Accountability - National Magazine Awards

Roger Martin: The Virtue Matrix Reloaded

5 Important and Timely New Books by 5 Rotman Professors

Integrity: Without it, Nothing Works

George Loewenstein: How Mattering Maps Affect Behaviour

The Magazine of the Rotman School of Management / Fall 2009

“Relentless Change: A Casebook for the Study of Canadian Business History” (Rotman/U of Toronto Press, Fall 09) by Joe Martin, Adjunct Professor and Director, Canadian Business History Program @ Rotman

“Becoming the Evidence-Based Manager: Making the Science of Management Work for You” (Society for Human Resource Management/Davies-Black Publishing, Fall 09) by Gary Latham, Secretary of State Professor of Organizational Effectiveness @ Rotman

“The Design of Business: Why Design Thinking is the Next Competitive Advantage” (Harvard Business, Fall 09) by Roger Martin, Dean

“Dia-Minds: Decoding the Mental Habits of Successful Thinkers” (Rotman/U of Toronto Press, Fall 09) by Mihnea Moldoveanu, Professor and Director – Desautels Centre for Integrative Thinking @ Rotman and Roger Martin, Dean

Accountability

“Gravity Shift: How Asia's New Economic Powerhouses Will Shape the 21st Century” (Rotman/U of Toronto Press, Fall 09) ” by Wendy Dobson, Professor and Director – Institute for International Business @ Rotman

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Accountability Fall 2009

Upcoming Events Complete details are available at rotman.utoronto.ca/events

September 9, 6:00-8:00pm Rotman Expansion Groundbreaking Celebration September 14, 5:00-7:00pm Women and Leadership Series Speaker: Irene Rosenfeld, Chair and CEO, Kraft Foods, Inc

Yes, that David Rosenberg.

September 21, 5:30-7:30pm, Winnipeg Canadian Business History Series Speaker: Joe Martin, Director, Canadian Business History Program @ Rotman; Author, “Relentless Change: A Casebook for the Study of Canadian Business History” September 22, 5:00-7:00pm Design Thinking Series Speaker: August de los Reyes, Principal Design Director, Microsoft Surface

DAVID ROSENBERG, former Chief North American

Economist of Bank of America/ Merrill Lynch, has joined Gluskin Sheff as Chief Economist & Strategist, further enhancing the strongest investment team in our 25-year history. David’s proven ability to analyze and foresee global trends complements our demonstrated strength in bottom-up security selection. For management of portfolios of three million or more please call Ron Lloyd or Tim Stinson at 1- 866 - 681- 6001.

September 24, 4:00-6:00pm Women and Leadership Series Speaker: Sylvia Ann Hewlett, Founding President, Center for Work-Life Policy; Author, “Top Talent: Keeping Performance Up When Business is Down”

g lu s kin s he f f .c om

October 14, 8:00-9:10am Strategic Management Series Lecturer: Vinaushil Gautam, Professor of Management and Al-Sagar Chair Holder, Indian Institute of Technology October 14, 5:00-7:00pm International Business Series Speaker: Wendy Dobson, Professor and Director – Institute for International Business @ Rotman; Author, “Gravity Shift: How Asia’s New Economic Powerhouses Will Shape the 21st Century” October 21, 4:30-6:15pm Annual Mental Health in Workplace Forum October 27, 5:00-6:15pm Innovation in Business Series Speaker: Scott Anthony. President, Innosight LLC; Author, “The Silver Lining: An Innovation Playbook for Uncertain Times”

September 29, 5:00-7:00pm Canadian Business History Series Speaker: Joe Martin, Director, Canadian Business History Program @ Rotman; Author, “Relentless Change: A Casebook for the Study of Canadian Business History”

October 28, 5:00-6:15pm Leadership Experts Series Speaker: Matthew Barrett, former Chair and President, BMO Financial Group and former Chair and CEO, Barclays plc

September 30, 5:00-6:15pm Innovation in Business Series Speaker: Jonathan Lister (MBA 00), Managing Director, Google Canada

October 29: 5:00-6:15pm Social Media Series Speaker: Gary Vaynerchuk, Author, “CRUSH IT: Why Now Is the Time to Cash In on Your Passion”

October 1, 5:00-6:15pm Design Thinking Series Speaker: Sohrab Vossoughi, President, Ziba Design

October 30, 2009, 8:30am-5:00pm Rotman MBA Leadership Conference Speakers as of July 24: Barbara Stymiest, COO, RBC Financial Group, Michael Horgan, Executive Director, International Monetary Fund, Leigh Gallagher, Senior Editor, Fortune Magazine, Robert Deluce, CEO, Porter Airlines, Jonathan Greenblatt, Co-Founder, Ethos Brands, Henry Gonzalez, VP, Emerging Markets and Microfinance, Morgan Stanley, Andrew Winston, Founder, Winston Eco-Strategies, Michael Lee Chin, Chair, Portland Holdings, Don Morrison, COO, Research in Motion, Beth Comstock, CMO, GE

October 8, 7:00-9:00pm, Hong Kong International Business Series Speaker: Wendy Dobson, Professor and Director – Institute for International Business @ Rotman; Author, “Gravity Shift: How Asia’s New Economic Powerhouses Will Shape the 21st Century”

Wea l t h a nd Risk M a n a g e m e n t

October 13, 4:00-5:15pm Talent Management Series Speaker: Michael Lee Stallard, President, E Pluribus Partners; Author, “Fired Up or Burned Out: How to Reignite Your Team’s Passion, Creativity, and Productivity”

Rotman Magazine Fall 2009 / 125

Accountability Fall 2009 Features 4 The Virtue Matrix Reloaded by Roger Martin, Alison Kemper and Jennifer Riel

40 The Promise: The Basic Building Block of Accountability by Mihnea Moldoveanu

CSR has long been without widely accepted, actionable tools. The Virtue Matrix aims to clear the muddy waters.

Where does accountability start? It starts with you, as soon as you open your mouth for the purpose of voicing a word.

16 Integrity: Without It, Nothing Works Interview by Karen Christensen

46 Leveraging Diversity Through Psychological Safety by Amy Edmondson and Kathryn Roloff

Integrity is a matter of a person’s word – nothing more and nothing less. Michael Jensen explains.

28

Diversity is a key part of the modern landscape, but left unchecked, it can impair both performance and learning.

22 How Mattering Maps Affect Behaviour by George Loewenstein and Kalle Moene

52 Leadership for Change Compiled by Karen Christensen

‘Mattering maps’ exist for every person, social environment and for society as a whole, exerting a powerful influence on our behaviour.

Five prominent business leaders/ social entrepreneurs discuss their unique approach to corporate social responsibility.

28 See No Evil: Why We Overlook Other People’s Unethical Behaviour by Francesca Gino, Don Moore and Max Bazerman

58

People have a tendency to evaluate unethical acts only after the fact – once the behaviour has resulted in a bad outcome. Here’s why. 34 Who’s With Me? False Consensus and Network Centrality by Francis Flynn and Scott Wiltermuth

People often overestimate the degree to which others share their views, and there are implications for ethical decision making.

58 New Challenges for Corporate Governance by David Beatty

Imminent reforms in risk management and compensation responsibilities will once again challenge director effectiveness. 64 Towards an Accountable Capitalism by Stephen Davis, Jon Lukomnik and David Pitt-Watson

64

Moving towards accountable capitalism requires rethinking the system’s overall architecture.

In Every Issue

Idea Exchange “Not only will we design our way out of this mess, we will design a new way to do business and to communicate with each other.” – Valerie Casey, p.80

70 Questions for: Nicholas Christakis 74 Questions for: David Messick 77 Questions for: Valerie Casey 81 Point of View: David DeRemer 85 Questions for: Russell Palmer 89 Faculty Focus: Nina Mazar 93 Faculty Focus: Ole-Kristian Hope 96 Faculty Focus: Dilip Soman 99 Point of View: Mollie PainterMorland 103 Questions for: Thomas Donaldson

3 From the Dean 12 Thought Leader Interview: Paul Volcker 106 News Briefs

12 70

110 Rotman Experience: Jason Chen (MBA ’09) 112 Alumni Capsules 114 Alumni Dispatch: Richard Wiltshire (MBA ’07) 117 Class Notes 125 Upcoming Events

77 Rotman Magazine is printed by Harmony Printing with vegetable-based ink on Cascades Enviro 100 paper. The cover is printed on Mohawk Options. Both papers are made from 100 per cent post-consumer waste.

96

Cert no. SW-COC-002063

Rotman Magazine, Fall 2009 Rotman magazine is published three times per year by the Rotman School of Management, University of Toronto. Subscriptions

are available for CAD$99 per year at rotman.utoronto.ca/subscribe Editor-in Chief: Karen Christensen ([email protected]) Contributors Steve Arenburg, David Beatty, Ole-Kristian Hope, Alison Kemper, Roger Martin, Nina Mazar, Ken McGuffin, Mihnea Moldoveanu, Jennifer Riel, Dilip Soman, Jack Thompson, Stephen Watt Design Underline Studio Inc. Cover “Finger Pointing” (1973) by Roy Lichtenstein, courtesy of the Estate of Roy Lichtenstein and SODRAC.

Copyright 2009. All rights reserved. To submit a change of address, please contact us at Rotman Magazine, Rotman School of Management, 105 St. George Street, Toronto, on m5s 3e6 Tel: 416-978-0240 Fax: 416-978-1373 E-mail: [email protected]

From the Dean:

Roger Martin

Accountability took full responsibility for their actions, where people did what they said they would do, and where it was commonplace to look beyond our personal goals to consider those of our communities, our organizations and the world at large. A cursory look around today’s environment indicates that we are far from reaching such a utopian state of accountability. Accountability entails a level of ownership that involves a) making, b) keeping and c) proactively answering for personal commitments. Simply put, when someone is accountable, he or she can be counted on to complete their duties or responsibilities with a high level of quality, based on clearly-defined expectations. Almost by definition, accountability is an emotionally-charged word, as it often arises when there is discontent and is frequently associated with blame, divisiveness and hostility. It is easy to take credit for our positive choices, because we are often rewarded for them; it is much harder to stand up to our mistakes. Historically, the best leaders have flourished because they have understood how to exercise accountability in service of their followers, and in many ways it has become the pre-eminent virtue of organizations. In this issue of Rotman, we take a look at what it means to be accountable, to our organizations, our communities, our planet and most importantly, to ourselves. Until recently, issues such as the environment, poverty and health care were viewed as social problems. However, as Michael Porter writes in the introduction to the 11th edition of On Competition, “each is inextricably bound up with Economics and, more specifically, with competition.” Like Porter, I am increasingly convinced that there are huge win-win opportunities for both society and business if we approach these issues in the right way. I kick things off on page 4 with The Virtue Matrix Reloaded, a follow up to my 2002 Harvard Business Review article. IMAGINE A WORLD WHERE EVERYONE

‘Mattering maps’ – a depiction of what matters to the people involved in any given circumstance – coordinate the aims and actions of the disparate individuals who form groups, creating a sense of shared purpose. But the results aren’t always positive, as Carnegie Mellon’s George Loewenstein and his co-author show in How Mattering Maps Affect Behaviour, on page 22. Diversity – not only of race and gender but of opinion, expertise and status – is an undeniably important feature of today’s landscape. Unfortunately, as a feature of work teams, it can lead people to suppress their thoughts and ideas. Harvard’s Amy Edmondson and Kathryn Roloff describe how to combat the ill effects of three particular types of diversity in Leveraging Diversity Through Psychological Safety, on page 46. The current crisis and the bad behaviour that enabled it have led many to call for a redesign of our economic architecture. Amongst other things, ‘accountable capitalism’ would entail a preference for transparency in all transactions and an end to opaque trading. Yale’s Stephen Davis and his colleagues provide the blueprints for a new market architecture in Towards an Accountable Capitalism, on page 64. Elsewhere in this issue, Harvard’s Nicholas Christakis explains how our behaviour affects the health of those around us, on page 70; IDEO’s Valerie Casey describes her ‘Kyoto Treaty’ for designers on page 77; former Wharton Dean Russell Palmer discusses what is missing from the current leadership landscape on page 85; and Rotman Professor Ole-Kristian Hope discusses the relation between analysts’ recommendations and stock returns on page 93. Stakeholders have every right to expect business leaders to not only communicate the types of behaviour that support their organization’s vision and values, but to publicly model those ideals as well. The good news is that most executives want to leave their organizations – and the world – a better place by creating value for those whose lives they affect. In the end, accountability is an opportunity for each of us. It is an opportunity to contribute to our organizations, our communities and the world at large, and to be counted among the people whom we truly admire and respect. Try as we might, none of us can completely control what happens in our organizations or in our lives. What we do have control over is how we respond to situations: we can choose to be 100 per cent accountable for our response. Now is the time to step up to the plate. Rotman Magazine Fall 2009 / 3

WHAT CAN IT TELL US ABOUT CORPORATE SOCIAL RESPONSIBILITY NOW?

by Roger Martin, Alison Kemper and Jennifer Riel

‘CSR’ has long been poorly defined, without widely accepted, actionable tools. The Virtue Matrix aims to clear the muddy waters.

AKE A SEAT IN ANY BOARDROOM or MBA classroom and eventually, the underlying mantra will emerge: “the business of business is business.” So said Milton Friedman in 1960. And so it has been. In sum, Friedman and his Shareholder Value Theory acolytes argued that a company’s sole responsibility is to maximize the return to its shareholders. The company holds no additional responsibility to society at large; instead, its goal is to drive value – as measured by stock price and dividends – ever upwards. This pervasive view has been inculcated in business schools and enacted in the real world, informing everything from financial market regulations to stock incentive plans. Unfortunately, it is based on a shallow line of reasoning that has also led to problematic social, environmental and economic out-

comes, blinding corporations to alternative views and creating ethical minefields for executives. The ‘profits-at-any-cost’ model led JP Morgan to pioneer credit derivatives as a new money-making tool in the 1990s. So far, so good – credit derivatives held the promise of helping financial companies more effectively manage the risk of their portfolios. But before long – under pressure from U.S. regulators to insure the risk associated with these credit vehicles – JP Morgan began to look around for the least-regulated jurisdiction in which to insure them and to find a partner not bound by the strict reserve capital requirements faced by U.S. banks. At the same time, Shareholder Value Theory led one of JP Morgan’s biggest customers – insurance giant AIG – to go after the significant financial rewards associated with insuring those Rotman Magazine Fall 2009 / 5

Figure One

The Virtue Matrix

FRONTIER (intrinsic)

CIVIL FOUNDATION (instrumental)

credit derivatives. They hired traders who had once worked for junk-bond king Michael Milken and set them up in London, where the regulatory structures were less restrictive than in New York and where the regulators were even less interested in overseeing the new financial behemoth under their noses. Through artful strategy, AIG managed to set-up its Financial Products division to be largely free of any oversight at all: it was regulated not by the SEC but by the tiny U.S. Office for Thrift Supervision, which had virtually no expertise in the credit default swap arena. All of this makes sense in light of Friedman’s doctrine. Regulations, after all, impede profits, so AIG was bound to do anything it could to skirt them, staying within the letter – if not the spirit – of the law while exposing itself and its partners to massive, little-understood risks in pursuit of massive profits. By the time the U.S. mortgage market crashed in 2008, AIG’s London-based Financial Products group had entered into almost a half-trillion dollars worth of credit default swap agreements. The massive losses associated with its defaults would lead to the largest government bailout in U.S. history and the worst financial crisis since the Great Depression. And it all happened in the singleminded pursuit of ‘greater shareholder value.’ The Need for an Alternative Model

There is no doubt about it: Shareholder Value Theory is elegant, understandable and implementable. It is supported by an elaborate infrastructure of tools like discounted cash-flow analysis or cost-of-capital calculations, and metrics like earnings-per-share 6 / Rotman Magazine Fall 2009

growth or total shareholder return. Despite the cautionary tales, it shows little sign of loosening its grip on the C-suite, and part of the reason is that we have lacked a viable alternative: there has been no widely-accepted theoretical model of pro-social corporate decision making, nor a set of tools to do business differently. It is not enough for us to point out the flaws of Shareholder Value Theory and say “we can do better,” or to ask executives to avoid the minefields and admonish them to “do good!” Nor is it enough to have MBA students adopt a Professional Oath of Honour, as our friends at the Thunderbird School have done. Laudable as these impulses are, they assume that people can change their behaviour just by wanting to do so. They ignore the possibility that business people are already being as good as they know how to be, given the models and tools at their disposal. No, business people will only act differently if they are provided with a framework every bit as clear and robust as Shareholder Value Theory and real tools for thinking about corporate social responsibility. What business leaders need is a way of thinking strategically about CSR and an actionable framework for thinking about more than shareholders that leads them to act like human beings rather than self-interested agents. This was the argument laid out in “The Virtue Matrix: Calculating the Return on Corporate Responsibility” [Harvard Business Review, 2002.] It is time to revisit the Virtue Matrix. The Virtue Matrix

The aim of the Virtue Matrix was to provide a concrete, actionable framework for companies to assess opportunities for socially-responsible action and create a corporate citizenship strategy. The Matrix consists of four quadrants. The bottom two – choice and compliance – make up the civil foundation. The civil foundation reflects the broad norms, customs and laws that govern corporate practice. Companies either engage in these practices by choice (they choose to conform to a set of norms, without being compelled to so by government regulation) or in compliance (they comply because they are mandated to do so by law). In the civil foundation, actions taken do no more than meet society’s existing expectations, maintaining the status quo rather than moving society forward. Such actions align well with the interests of shareholders and the pursuit of profits. For example, in the choice quadrant, a

company might choose to give money to charity to bolster its corporate reputation and vow to generate more sales to offset that charitable gift. In the compliance quadrant, a company might undertake specific activities designed to keep itself on the right side of the law – say, by instituting information seminars on sexual harassment, or following worker-safety regulations to prevent costly lawsuits and reputational damage. These forms of CSR explicitly serve the purpose of enhancing shareholder value and as such, can be described as instrumental. But what of the kind of socially-responsible activity that business leaders initiate regardless of its effect on shareholders – actions that a company undertakes because it sees those actions, first and foremost, as ‘morally right’? The motivation for these kinds of actions is not so much instrumental as intrinsic – that is, executives engage in this conduct for its own sake, rather than specifically to increase shareholder value. The critical distinction when it comes to intrinsically-motivated behaviour is that some actions can turn out to benefit society and increase shareholder value, while others benefit society but hurt shareholder value. This distinction is the dividing line between the top two quadrants of the Matrix – the strategic frontier and the structural frontier. At top left, the strategic frontier represents individual action – in which a single firm engages in socially-responsible behaviour that ends up benefiting both society and shareholders. A classic example is The Body Shop, which offered an environmentallyand animal-friendly approach to personal care and beauty products. The approach, and the brand, took off with consumers in a way that both made the world a better place and generated hugely positive returns for shareholders. In the top right box, the structural frontier, actions benefit society but hurt shareholder value. In this quadrant, initiatives taken by a single company tend not to last, because the cost to shareholders is too great. Imagine that the leaders of a single firm decide that spending resources to reduce greenhouse gases is the morally right thing to do. The firm invests in its new green initiative, but it gets no reward from customers for doing so. In the process, the firm becomes less cost competitive and is forced either to stop the initiative or go out of business. Economists would say that in the structural frontier, the externalities are too great: actors outside the company garner the lion’s share, if not all, of the benefits. In the greenhouse gas example, the world benefits;

shareholders lose out, and this win-lose dynamic creates a serious barrier to corporate action. The solution within the structural frontier is collective action. If an entire industry or consortium decided to act collectively on greenhouse gas emissions, it could do so together, contributing significantly to society while avoiding huge, imbalanced costs to the shareholders of a single company. Activities in one quadrant of the Virtue Matrix can influence the others. When activities in the strategic frontier become successful, they tend to be copied and become norms for society more generally. For example, after the success of The Body Shop, it was obvious to all beauty-care companies that being more environmentally-and animal-friendly made lots of economic sense. When successful actions take place by way of a coalition in the structural frontier, governments can ensconce the successful joint action into law. Both of these movements from the frontier have the effect of ratcheting up the civil foundation, strengthening it for all of society. Alternatively, firms and collectives can chip away at the civil foundation, advocating for less government regulation or moving operations to jurisdictions with lower standards of behaviour. AIG, Merrill Lynch and the thousands of mortgage brokers who encouraged borrowers to take out subprime mortgages all chipped away at the civil foundation, to our collective detriment. In the right hands, the Virtue Matrix provides the tools to become a truly exemplary corporate citizen. RBC Financial – one of the first companies to actively employ the Virtue Matrix in developing its CSR strategy – worked with us on the effort. In our work together, it became clear that, as a federally-chartered Canadian bank, RBC already met exacting compliance requirements. As a long-time civic leader, it dominated the choice quadrant, earning accolades and loyalty for its philanthropy and community engagement. Indeed, during our consulting engagement, RBC was selected as the firm with the best CSR policies and practices in the world. Yet it chose to push on to develop new models of corporate citizenship. With the enthusiastic support of Chief Operating Officer Barb Stymiest, RBC developed the Blue Water Project™, a bold initiative at the very edge of the strategic quadrant. In 2007, RBC began by committing $50 million over 10 years to support initiatives that foster a culture of water stewardship. This wasn’t a case Rotman Magazine Fall 2009 / 7

INSTEAD OF STRIDING BOLDLY INTO THE STRATEGIC FRONTIER OR COLLECTIVELY INTO THE STRUCTURAL FRONTIER, FIRMS HAVE FAILED TO ACT OR HAVE CHIPPED AWAY AT THE CIVIL FOUNDATION.

of throwing money at a charitable cause and hoping customers noticed: this was RBC choosing to become distinctively identified with a critically-important issue. By using the Virtue Matrix, RBC was able to apply business logic to an environmental opportunity – using tools similar to the ones it would use to assess a new product or service. In doing so, RBC raised the bar for CSR performance by using its resources not to meet existing expectations of a big bank, but to change the trajectory of Canadians’ water use. RBC has long been considered a good company. Now, it has moved the goalposts, and other firms may have to step up to the challenge. The Virtue Matrix Today

As firms like RBC have come to embrace the Virtue Matrix as a critical tool for thinking about CSR, many others continue to cling to the tried and true path. As the financial crisis of 2008 demonstrates, there is a long way to go. In many ways, this crisis represents a crossroads for Shareholder Value Theory, CSR and the Virtue Matrix. As we pick up the pieces of our global economic systems, it is important to ask how we should think about the Virtue Matrix now. To begin, let’s look at another aspect of the 2008 crisis – the subprime mortgage meltdown. The number of subprime mortgages – mortgages offered to individuals with poor credit history or little collateral – issued in the U.S. had grown dramatically in the five years leading up to 2008, in response to a thriving financial market for mortgage-backed securities. So long as the U.S. housing market continued to grow and workers stayed employed, the system was utterly reliable: Americans had easy access to mortgages and financial services firms had derivative products with predictable and easy returns. Unfortunately, the system was also utterly invalid, resting on assumptions made about historical subprime mortgages and the default rates associated with them back when the banks held the mortgages themselves, and had an incentive to prevent default. The system also rested on the assumption that U.S. housing prices would continue to rise, or would at least level off slowly. Of course, as the price of oil went up, shipping and other costs grew, businesses began 8 / Rotman Magazine Fall 2009

to fail, commuting became more expensive, suburban housing became undesirable, the housing market crashed and mortgage default rates increased dramatically. All of a sudden, those reliable mortgage-backed derivatives become toxic, and billions of dollars of value evaporated from the world’s financial markets. Many have argued that the subprime debacle was an outlier event, perpetuated by evil individuals in a blind mix of ignorance and greed, and now that it is behind us, we can clear up the mess, put in some stricter regulations and move on with our lives. The onus has fallen on the government to step in with solutions, because, as the argument goes, the financial services sector resolutely refused to behave responsibly of its own accord. Indeed, in the run up to the crisis, financial corporations were playing regulatory arbitrage and seeking to ratchet the civil foundation back down through deregulation. This is not the first time that the innovative capacity of business has outstripped its capacity to self-regulate. Our ability to devise new algorithms and exploit weaknesses in the regulatory framework has created crises before. In the early 1990’s, Long Term Capital Management generated 40 per cent returns to its investors by taking enormously-leveraged positions and using financial models to detect and exploit tiny arbitrage opportunities. In the 1980’s, American savings and loans institutions took greater investment risks to meet the challenge of high inflation. They exploited thrift industry deregulation to lend to less secure businesses and to maintain much lower levels of reserves. Of course, both LTCM and the S&Ls eventually collapsed dramatically, driving enormous financial instability. In all of these cases, including the current one, firms arbitraged regulatory gaps and used innovative instruments to generate private wealth without regard for public welfare. They eroded the civil foundation by forcing the diversion of public funds to offset private downside risk, and worked diligently to minimize regulation and oversight. All went swimmingly until the dynamic systems that underlie the global economy shifted, making the new instruments cataclysmically unreliable. The end result in each case was a widespread public call for increased government regulation (and a notinsignificant decline in the reputation of bankers).

It is a predictable pattern. Blinded by the incentives of Shareholder Value Theory, the system came to rely on past data to predict the future and to ignore its responsibilities to contribute anything other than ever-higher profits. As a result, the government acted to increase regulation and to legislate responsible behaviour. The problem with this pattern is twofold. First, the pendulum may swing too far: regulators may act with a machete rather than a scalpel and all of us – society and shareholders – may emerge a little poorer. Second, and even more likely, regulators may attempt to control behaviour that has already been completely discredited and abandoned by the industry, failing to anticipate the next arbitrage opportunity or financial derivative. This would leave citizens and businesses as exposed to financial turmoil and risk as they were before. Moving Forward

Clearly there are exceptions, but in general we have seen a failure of business to show leadership. Instead of striding boldly on their own into the strategic frontier or collectively into the structural frontier to affect positive change, firms have failed to act or have acted to chip away at the civil foundation. This dynamic – and the crisis it precipitated – has encouraged, if not forced, government into action to protect the civil foundation. Not surprisingly, government has turned to its most powerful tool – legislative action – to buttress the compliance quadrant. This is a legitimate reaction: no government should let corporations profit by diminishing the civil foundation, and legislation can help prevent this. But in this environment, there is a real danger that the government will actually over-expand the compliance quadrant. It is difficult for governments to calibrate their actions and create solutions that are measured and flexible; an overlyaggressive government can inadvertently drive out corporate action in the frontier, to the detriment of society. While actions that expand the civil foundation are generally positive, a more productive way for the civil foundation to expand is organically – for corporations to venture into the strategic frontier, creating winning ideas that are emulated and copied until they become norms, and for corporations to take collective action

in the structural frontier, solving complex problems with cooperation and support of governments. Given that governments have begun to expand the compliance quadrant, and that actions in one quadrant of the Virtue Matrix affect the others, how should companies think about their own CSR initiatives? Are there still opportunities in the frontier? The short answer is yes, but there will be challenges. In addition to dealing with expanded compliance, the firm seeking to venture into the frontier faces a new wrinkle: increasingly, corporate initiatives in the strategic frontier are being seen as ‘greenwashing’. No wonder, when so many firms have cynically and disingenuously promoted false or misleading green claims: Shell recently claimed in an advertisement that their Alberta Oil Sands project was “not only profitable but sustainable.” Challenged by the World Wildlife Fund, Shell had to admit that its definition of ‘sustainable’ included economic and social considerations, which led the Advertising Standards Agency to rule that Shell had intentionally misled the public with their claim. This is but one example. A recent study, reported in the Financial Times, indicated that almost two-thirds of consumers believe that companies’ green communications are merely marketing tools that lack authenticity. All of this makes activity in the strategic frontier more challenging. While it is unwise to give up on action in the strategic frontier, it is unclear to what extent such actions will motivate favourable consumer behaviour in the current climate. And without favourable consumer reaction, strategic-frontier initiatives tend to fail. It is arguable that in this environment, the most productive approach to corporate citizenship – over and above fully supporting the civil foundation – is to be proactive and creative in the structural frontier. If industries don’t get together to promote constructive progress in the structural frontier – by working to produce outcomes that citizens want but which can’t be economically produced by the actions of a single firm – governments will take action (as they have in the financial services and automotive industries), and those actions may not be optimal. There is encouraging precedent for proactive action in the structural frontier. In 1999, in anticipation of the implementation Rotman Magazine Fall 2009 / 9

A MORE PRODUCTIVE WAY FOR THE CIVIL FOUNDATION TO EXPAND IS ORGANICALLY – FOR CORPORATIONS TO VENTURE INTO THE STRATEGIC FRONTIER AND CREATE WINNING IDEAS THAT ARE EMULATED UNTIL THEY BECOME NORMS.

of the Kyoto Accord, three cement companies began to discuss the painful issues they all faced. They knew that the big global cement producers were disproportionately huge producers of CO2 and they decided to deal with their challenges as a collective. By 2001, they had formed the Cement Sustainability Initiative, an organization of 18 companies under the umbrella of the World Business Council on Sustainable Development. These firms recognized that by working together, they could reduce the risk of enacting better sustainability practices to their shareholders and customers. Together, they set out an agenda for action in five areas ranging from CO2 reduction to local impacts on communities. While the Initiative was triggered by the imminent threats and opportunities of Kyoto, it has also provided an ongoing mechanism to improve the practices of cement companies everywhere. The industry’s footprint is enormous: these firms could see that they were at risk of attracting conflicting, protectionist, ill-conceived or capricious regulatory action. By banding together, they have improved their technology, reduced costs and risks and made enormous reputational gains. There are other encouraging signs. American health insurers, recognizing the threat of a public plan to their domination of a lucrative industry, have chosen to work together with the Obama Administration to identify $2 trillion in savings over the next 10 years. At the end of the day, they may deepen the civil foundation by providing health coverage to more unemployed, sick and lowincome Americans; and they will have done so by focusing on collective action in the structural frontier. While there is still a role for initiatives in the strategic frontier, right now such initiatives might need to take a lower priority on the corporate agenda. Instead, corporations need to be absolutely certain that they are in full compliance with laws and regulations – and be prepared to demonstrate proactively that they are. They should be on their best behaviour with respect to the norms of their industry and jurisdiction, and they should act boldly on the biggest structural frontier issues in their industry and/or region. The last imperative won’t be easy, as the structural frontier demands specific skills: foresight, clarity and collaboration are critical. As in the Cement Sustainability Initiative, firms will need 10 / Rotman Magazine Fall 2009

to identify and work with even the most unlikely allies: their own competitors and regulators. In closing

The goals of CSR have long been poorly defined and unclear, and as a result, companies have been uncertain of the rules or the benefits of doing what is ‘right’. As regulations become tighter, money scarcer and solutions more difficult, the capacity of firms to innovate in this arena will become increasingly valuable. Society needs firms to use their most business-like skills – innovation and discernment – along with new tools such as the Virtue Matrix to solve our most challenging problems. The Virtue Matrix is a tool for helping a company assess and build its own CSR strategy. Which of its activities conform to the minimal-acceptable guidelines of the civil foundation? Where are opportunities for strategic action that exceed the requirements of the foundation and advance the corporation relative to its peers? Where are structural barriers to change, and how can they be overcome? By explicitly addressing such questions, a firm can develop a robust and sustainable CSR strategy. Here’s what companies with great leadership will do: fully comply with the laws of their industry and jurisdiction and be able to demonstrate that they know they are in compliance; meet the highest level of current non-regulated norms; have projects underway in the strategic frontier; and be active participants in structural frontier projects as well. In this way, a company will protect the best of what currently is – the civil foundation – and contribute to the expansion of what could be, through activities on the frontier.

Roger Martin is Dean, Premier’s Research

Chair, professor of Strategic Management and director of the AIC Institute for Corporate Citizenship at the Rotman School of Management. Alison Kemper (MBA ’04) is a Rotman PhD candidate in Strategic Management. Jennifer Riel (MBA ’06) is associate director of the Desautels Centre for Integrative Thinking at the Rotman School.

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Raised by parents who taught him that a person’s integrity is his greatest asset, the head of President Obama’s Economic Recovery Board has plenty to say about recent events in this April 2009 interview.

Thought Leader Interview:

Paul Volcker by Karen Christensen

By your own account, the financial crisis has reached a critical point. How did this happen?

Which key economic imbalances were ignored leading up to this crisis?

What we are seeing is the culmination of economic imbalances, a succession of financial bubbles and crises that have been building for years. This was all complicated by undue faith in ‘financial engineering’, which attempted to rely on mathematical models to measure and control risks in markets that respond to human and not physical phenomena. As a result, confidence in financial management has been badly eroded. On the bright side, there is good reason to believe that the means are available to turn the tide. There is clear recognition that the problem is international, and global coordination and cooperation is both necessary and underway. The days of finger pointing are over, and the groundwork can be laid for reconstructing our financial and regulatory systems from the bottom up. Recent U.S. legislation has provided authority for large-scale direct intervention by the Treasury in the markets. None of this is easy; some of it poses risks for the taxpayer, and all of it is decidedly unattractive in the sense of official intervention in what should be private markets that can stand on their own feet. Unattractive or not, the point is that the tools required to restore and maintain functioning markets are at hand. To that end, the immediate need is determined, forceful and persistent leadership. Both the public and private sectors must be involved, and in my view, the recent extraordinary interventions by the government (and taxpayers) should be ended as soon as possible. Think of it: we are now in a government-dependent financial system. I never thought I would live to see the day.

The big imbalance that led to the crisis, I believe, is reflected quite directly in the U.S./China relationship, although I could extend this further than those two countries. We’ve had a strongly consumer-driven economy in the U.S., and with things seeming to go well, consumption and spending have exceeded our production capacity. At the same time, that consumption was satisfied by borrowing from abroad, because the productive capacity of China exceeded what its people wanted to spend internally. Basically, China lent us the money to ‘hang ourselves’ with. It was all very comfortable while it was happening, but it couldn’t go on forever, and it led to some extremely weak credit-extension policies, symbolized by so-called ‘subprime mortgages’.

12 / Rotman Magazine Fall 2009

I think it’s fair to say that modern Wall Street – over the last 20 years or so – completely lost any sense of ‘reasonable restraint’. The advantages of risk-taking and high-compensation practices seem to have overwhelmed any natural instincts toward prudence, and what we are now seeing is the result of that. There has been public outcry concerning the bonuses being paid to employees of bailed-out institutions. What is your take on this situation?

Compensation practices had clearly become excessive, and in turn were undermining a prudential sense of restraint in the

ILLUSTRATION BY COLIN BERGH

You are widely regarded as a Wall Street skeptic. What are its key problem areas?

markets. When some of the big financial firms got into trouble and had to rely upon government assistance, it was both inevitable and appropriate that their compensation practices would be looked at. Having said that, it is a very difficult area to come to grips with, and one would hope that the market, institutions and directors will finally reach the conclusion that compensation practices have to be reined in. You have said that “both the market and the political system will always try to game the Federal Reserve and find ways of getting around restraint.” What are the implications for the Fed’s role going forward?

I could extend that comment to the tendency of the market to try to get around any regulations, whether they come from the Federal Reserve or not, and to do what’s called ‘regulatory arbitrage’ – moving from a tough regulator to a lighter regulator (or no regulator) if they can. Nobody likes restraint, so when the central bank tries to restrain, the natural instinct is to find a way around it, to find substitutes that are less directly under central bank influence. This raises questions for an overhaul of the entire regulatory system, and there will be implications for the Federal Reserve’s role. The Fed has been undertaking a lot of unorthodox policies in an effort to stabilize the current situation, and this raises questions, particularly with its huge commitment of public money. It may be inevitable that the independence that has been so sacred to that institution might be reviewed or modified, and their regulatory responsibilities placed elsewhere. None of these concerns are new, by the way. Back when I was Fed chairman, I can remember tossing and turning at night thinking ‘whatever we do, the banks will try to game us’. At the end of the day, could they use the same reserves to satisfy our requirements and the reserve requirements in Asia and England? Would the result be an inability to control the effective money supply through U.S. reserve policy? Now the regulatory responsibility is at issue, with respect to how globalization affects policy transmission. Your strong stand against inflation in the 1970s under President Jimmy Carter laid the groundwork for 20 years of growth. Will inflation play a role in the current scenario?

It is not the worry immediately, given the decline in the economy, the distortions in credit markets and the lack of free-flowing credit. But plainly, as the economy recovers – and it will recover, although I can’t predict the time period or the strength of the recovery– the Fed is going to have a great challenge in restraining the flow of money and credit to what is appropriate to maintain stability. So we’re talking about another potential problem maybe two or three years out. You have described one possible vision for the future, which involves a two-tiered financial system. Please describe it.

I believe that the basic commercial banking business, not very narrowly defined, is and should be at the heart of the system. It’s been protected; it will continue to be protected, not just by regulation but by access to Federal Reserve facilities, by deposit insurance. The banks carry responsibilities beyond that of ordinary market 14 / Rotman Magazine Fall 2009

participants. They control the payment system, they are a custodian for money, they provide credit for businesses, households and governments, and they also provide credit for other financial institutions. Recent developments aptly reflect the fact that commercial banking is the heart of the system. So my thought is that their activities may be somewhat restricted to concentrating on all the things they do for customers – households, businesses or otherwise – whereas more speculative, capital market-driven activity ought to be largely the province of outside the banking system, which needs to be less-closely regulated. The current crisis has implications for the future of market infrastructure, accounting and credit rating agencies, amongst other things. Within which area do you foresee the most transformational changes coming?

I think there will be a lot of changes, including the ones you mention. Certainly, credit rating agencies need a review; accounting is getting a review; and the world of derivatives and particularly credit default swaps needs a review. But more generally, I think the role of banks and who supervises them is going to be at the heart of the reform. Is more regulation part of the answer?

Stronger regulations are definitely needed to protect the world economy from such future shocks. I am concerned about the amount of power central banks, treasuries and regulatory agencies have acquired while trying to contain the meltdown. The central bank – not just in the U.S. – out of perceived necessity is taking on a role that is way beyond what it should normally be. Looking ahead, major banks should be more tightly controlled and less able to make the sort of risky bets that led to the current debacle. There should also be more oversight of some kind for hedge funds, equity funds and the remaining investment banks. People argue that this will stifle innovation, but ‘innovations’ like asset-backed securities and credit-default swaps have brought few benefits. Most would agree that this ‘bright new financial system’ has failed the test of the marketplace. Let’s face it, the most important innovation in banking for most people in the last 20 years is the automatic teller machine. You have discussed the possibility of a world currency. How far off is it?

I think the long-term logical result of a globalized financial system – extending far beyond my lifetime, but perhaps not yours – is a world currency. With a world currency, we would not have a lot of independent central banks. I haven’t figured out what the one remaining central bank would do, what instrument it would use or how it would be controlled, but I think that is the direction in which economic and financial logic guides us. However, I suspect there will be a lot of way stations along the road. For example, I’m pretty sure we are going to move to some regional currencies, and we will almost certainly have many fewer national currencies. Will we have a few large central banks centered in big countries and monetary centres, each with some influence, but with their interrelationships guided, influenced and affected by the exchange rate

Charting Paul Volcker’s Career

1952: Volcker joins the staff of the Federal Reserve Bank of New York as a full-time economist. 1957: He takes a job as an economist at Chase Manhattan Bank, where he becomes a lifelong confidant of the Rockefeller family. 1962: He joins the U.S. Treasury Department as director of financial analysis, and in 1963 becomes deputy under-secretary for monetary affairs. 1965: He returns to Chase Manhattan Bank as vice president and director of planning. 1969-1974: He serves as under-secretary of the Treasury for monetary affairs, responsible for both domestic and international finance.

PHOTO: CORBIS

1975: He is named president of the Federal Reserve Bank of New York and a senior fellow at the Woodrow Wilson School of Public and International Affairs at Princeton University. 1979: He is appointed Chairman of the Federal Reserve by President Jimmy Carter and reappointed in 1983 by President Ronald Reagan. 1987 (post-Fed): He is named chairman of James D. Wolfensohn Inc., a corporate advisory and investment firm in New York founded by Wolfensohn (who later becomes president of the World Bank.) In recent years, he has led investigations into how Swiss bankers handled the accounts of Holocaust victims, the United Nations’ troubled food-for-oil program, the scandal surrounding the collapse of Enron and a review of the World Bank’s anti-corruption program. He also chairs the Group of Thirty, a who’s who of world economists that examines complex public policy issues. 2009: He is named chairman of President Obama’s Economic Recovery Advisory Board.

between them? Such a structure leaves open a lot of questions about the organization of the world economy in ways unrelated to central banking. Nevertheless, if the net result of that scenario would be widely-fluctuating exchange rates between major centres, that would not be conducive to the kind of multilateral open trading system and political harmony that we like to associate with the benign leadership of the U.S. and its partners during the postwar period. Going forward, what is your advice for consumers?

I can’t speak for Canadians, but Americans have been living above their means for far too long. Bringing consumption back in line with income will not only put a crimp (but a tolerable crimp) on individuals and families, it will also require major readjustments in the global economy, which has relied on the U.S. as a ‘consumer of last resort’. We have a tough period ahead of us. But when we dealt with inflation in the 70s, it laid the groundwork for 20 years of growth. I’d like to see that happen again, as a result of a different kind of adjustment.

Paul Volcker with his current boss, President Barack Obama.

Any advice for market participants?

There is, and must be, recognition of the essential role that free and competitive financial markets play in a vigorous, innovative economic system. There needs to be understanding, in that context, that financial ups and downs – and crises – will be inevitable, even with responsible economic policies and sensible regulation. But never again should so much damage be risked by a financial structure so fragile, so overextended and so opaque as that of recent years. What are you most proud of when you look back on your career?

I actually take great pride in working for the government. I always thought it was important to view my government as a ‘client’, to which I owed a high degree of responsibility. After 40 years in public service, I still think that. What has been discouraging is that over the years, the basic idea of the value of public service has been, to some degree, diluted and lost. I do believe the current crisis is going to reverse that a bit. I don’t know how true it is in Canada, but certainly in the U.S., young people are becoming more interested in government and are less ‘starry-eyed’ about making a living on Wall Street.

Paul Volcker is chairman of the Economic Recovery Advisory Board under U.S.

President Barack Obama. He served as chairman of the Federal Reserve under Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). This interview took place on April 28, 2009. Rotman Magazine Fall 2009 / 15

Integrity is a matter of a person’s word – nothing more and nothing less. Michael Jensen explains. Interview by Karen Christensen

There is some confusion between the terms integrity, morality and ethics. How do you differentiate them?

These three phenomena are widely understood to provide standards of ‘correct’ behaviour, but people generally get them mixed up. The primary differentiation I make between them is to distinguish integrity from morality and ethics. Integrity is a purely positive proposition. It has nothing to do with good vs. bad. Think for a moment about the Law of Gravity: there is no such thing as ‘good’ or ‘bad’ gravity; like integrity, it just ‘is’. Morality and ethics, on the other hand, are normative concepts in that they deal with matters of good or bad, right vs. wrong. Morality refers to a society’s standards of right and wrong behaviour for individuals and groups within that society, while ethics refers to the normative set of values that apply to all members of 16 / Rotman Magazine Fall 2009

a group or organization. Thus, both morality and ethics relate to desirable vs. undesirable behaviour. You define integrity as “what it takes for a person to be whole and complete.” What does this look like in daily life?

An individual is whole and complete when their word is whole and complete, and their word is whole and complete when they honour their word. We can honour our word in one of two ways: first, by keeping our word, and on time as promised; or second, as soon as we know that we won’t keep our word, we inform all parties involved and clean up any mess that we’ve caused in their lives. When we do this, we are honouring our word despite having not kept it, and we have maintained our integrity. If you are serious about being a person of integrity, you will think very carefully before giving your word to anyone or any-

WITHOUT IT, NOTHING WORKS

thing, and you will never give your word to two or more things that are mutually inconsistent. As they should, many people focus on the importance of keeping their word; however, if one does not consider how to maintain integrity when one cannot keep one’s word, this is sure to lead to out-of-integrity behaviour at some point. If you’re up to anything important in life, you will not always be able to keep your word, and that’s alright, but if you are a person of integrity, you will always honour your word. Integrity is important to individuals, groups, organizations and society because it creates workability. Without integrity, the workability of any object, system, person, group or organization declines; and as workability declines, the opportunity for performance declines. Therefore, integrity is a necessary condition for maximum performance. As an added benefit, honouring one’s word is also an actionable pathway to being trusted by others.

You believe that a key aspect of integrity involves the relationship one has with oneself. Please explain the importance of this.

One’s word to one’s self is a critical part of integrity. By not being serious when we give our word to ourselves, we forfeit the opportunity to maintain our integrity by honouring our word to ourselves. For example, think of occasions when the issue of self-discipline comes up, and the ease with which we often dismiss it. It may be something trivial like, ‘I’m going to work out tomorrow at nine o’clock’, or something serious like, ‘I will never cheat on my wife’. By failing to honour our word to ourselves, we undermine ourselves as persons of integrity. If we aren’t serious about this aspect of integrity, it will create ‘unworkability’ in our life: we will appear to others as inconsistent, unreliable or unpredictable. You simply cannot be a whole and complete person if you don’t honour your word to yourself. Unfortunately, people almost universally Rotman Magazine Fall 2009 / 17

Integrity, Morality and Ethics, Defined

Integrity: A state or condition of being whole, complete, unbroken, unimpaired, sound, in perfect condition. Morality: In a given society, in a given era of that society, morality is the generally-accepted standards of what is desirable and undesirable; of right and wrong conduct, and what is considered by that society as good or bad behaviour of a person, group or entity. Ethics: In a given group, ethics is the agreed upon standards of what is desirable and undesirable; of right and wrong conduct; of what is considered by that group as good and bad behaviour of a person, group or entity that is a member of the group, and may include defined bases for discipline, including exclusion.

ascribe the mess in their lives resulting from out-of-integrity behaviour to some justification or rationalization.

excess of a 300 per cent increase in output, with essentially no increase in inputs. And our people are happier.

Your Ontological Law of Integrity says that integrity has a critical effect on business: increased performance. How does integrity translate into performance?

Objects and systems can also have integrity. Please explain.

As I’ve said, integrity is a necessary condition for maximum performance. That is, if something is in integrity – is whole, complete, unbroken – it has maximum workability. But because it takes more than workability (a product of integrity) alone to realize maximum performance, integrity is not a sufficient condition for maximum performance. The proposition is that if you violate the Law of Integrity, the opportunity-set for your performance will shrink and therefore your actual performance is likely to suffer. As with the gravity analogy, this is just a plain fact: if you violate the Law of Gravity without a parachute, you will suffer severe consequences. We argue that if you respect the Law of Integrity you will experience enormous increases in performance, both in your organization and in your life. You believe that the effects of out-of-integrity behaviour are significantly more damaging than most people believe. Please discuss.

People tend to view integrity as a virtue that is ‘nice to have’, but not as something that is directly related to performance. They fail to link the difficulties in their lives or in their organizations to outof-integrity behaviour. But the increases in performance that are possible by focusing on integrity are huge: I’m not talking about a 10 per cent increase in output or productivity – it’s more like 100 to 500 per cent. At my organization [the Social Science Research Network (SSRN)] after a year and a half of implementing these notions, our CEO Greg Gordon will tell you that we’ve seen in 18 / Rotman Magazine Fall 2009

Integrity for objects and systems is a matter of the components that make up the object or system and the relationship between those components. Three critical aspects are their design, the implementation of the design and the use to which the object or system is put. If an object or system is to have maximum opportunity for performance, it must have integrity in each of these aspects. The design must be capable of fulfilling the purpose for which it was designed – for example, to provide transportation or flotation. In addition, to have integrity the implementation of the design must be whole and complete; and finally the use of the object or system must have integrity. If any of these three aspects is not present, the object or system will be ‘out-of-integrity’, its workability will be compromised and its opportunity for performance will be reduced. For example, if a 300-pound man attempts to use a life preserver designed for a 50-pound child, he is in big trouble This distinction – between the integrity of design, the integrity of implementation and the integrity of use – has proven to be of enormous value to me and my colleagues in running SSRN. Of course, any large computer system is going to have issues, and thinking about the source of problems as due to potential failures of integrity of design, integrity of implementation or integrity of use has resulted in enormous increases in productivity for us. What are the costs of dealing with an object, person or entity that is out-of-integrity?

Consider the experience of dealing with an object that lacks integrity, such as a car. When one or more of its components is missing or malfunctioning, it becomes unreliable and unpre-

‘One’s Word’, Defined

Integrity of an Organization, Defined

A person’s word consists of each of the following:

An organization (or any human system) is in integrity when:

1. What you said: whatever you have said you will do or will not do, and in the case of do, doing it on time.

1. It is whole and complete with respect to its word. This includes that nothing is hidden, no deception, no untruths, no violation of contracts or property rights, etc.

2. What you know: whatever you know to do or know not to do, and in the case of do, doing it as you know it is meant to be done and doing it on time, unless you have explicitly said to the contrary. 3. What is expected: whatever you are expected to do or not do (even when not explicitly expressed), and in the case of do, doing it on time, unless you have explicitly said to the contrary.

2. That is to say, an organization honours its word: • Internally, between members of the organization, and • Externally, between the organization and those it deals with. This includes what is said by or on behalf of the organization to its members as well as outsiders.

4. What you say is so: whenever you have given your word to others as to the existence of some thing or some state of the world, your word includes being willing to be held accountable that the others would find your evidence for what you have asserted. 5. What you say you stand for: What you stand for, whether expressed in the form of a declaration made to one or more people, or even to yourself, as well as what you hold yourself out to others as standing for (formally declared or not), is a part of your word. 6. The social moral standards, the group ethical standards and the governmental legal standards of right and wrong, good and bad behaviour, in the society, groups and state in which one enjoys the benefits of membership are also part of one’s word unless a) one has explicitly and publicly expressed an intention to not keep one or more of these standards, and b) one is willing to bear the costs of refusing to conform to these standards.

dictable, and it creates those same characteristics in our lives: the car fails in traffic; we inadvertently create a traffic jam; we are late for our appointment; and we disappoint our colleagues. In effect, the out-of-integrity car has created a lack of integrity in our life, with all sorts of fallout and repercussions that reduce workability. The same thing is true of our associations with persons, groups or organizations that are out-of-integrity. These effects generally go unrecognized, but they are significant. How does ‘cost-benefit analysis’ affect integrity?

This is a great failure of the curriculum of every business school I know: we teach our students the importance of conducting a cost/benefit analysis in everything they do. In most cases, this is useful – but not when it comes to behaving with integrity. In fact, treating integrity (i.e. honouring your word) as a matter of cost/benefit analysis virtually guarantees that you will not be a person of integrity. When not keeping my word, if I apply a cost/benefit analysis to honouring my word, I am either out-of-

integrity to start with – because I have not stated the cost/benefit contingency that is in fact part of my word when I give it, or to have integrity I must say something like the following: “I will honour my word when it comes time to do so if the costs of doing so are less than the benefits.” Such a statement, while technically leaving me with integrity, is unlikely to engender trust. Indeed, I have just told you that my word means nothing. If I had one recommendation for improvement to the curriculum of every business school, it would be to make it very clear to students that cost/benefit analysis is very important almost everywhere in life – but not with respect to honouring one’s word. In my view, this is a major root cause of the current economic crisis. Trust in the business community has plummeted in recent months. What has to happen for it to be restored?

Out-of-integrity behaviour has been pervasive, both on an organizational and an individual basis. Recall that the integrity of an object or system depends on the integrity of the design of that object or system, the integrity of the implementation of that design and the integrity of the use of that object or system. Looking at the subprime mortgage crisis, each element of the system evolved in a way that left it out-of-integrity: the system ended up such that people were rewarded for creating and selling mortgages and mortgage-backed securities, but not mortgages and mortgage-backed securities that would be paid. Obviously such a system lacked integrity, and we are paying a very steep price. Moreover, the politics of the situation is now encouraging homeowners (who gave their word to paying back the money they borrowed to purchase their homes) that it is OK to quit paying one’s mortgage in the case where the homeowner is ‘under water’ – that is, where the value of the home is now less than the mortgage on the home. Rotman Magazine Fall 2009 / 19

Causes of the ‘Veil of Invisibility’ Around Integrity

1. “Integrity is a virtue” For most people and organizations, integrity exists as a virtue rather than as a necessary condition for performance. When held as a virtue rather than as a factor of production, integrity is easily sacrificed when it appears that a person or organization must do so to succeed. For many people, virtue is valued only to the degree that it engenders the admiration of others, and as such it is easily sacrificed especially when it would not be noticed or can be rationalized. Sacrificing integrity as a virtue seems no different than sacrificing courteousness, or new sinks in the men’s room. 2. Self deception about being out-of-integrity People are mostly unaware that they have not kept their word. All they see is the ‘reason’, rationalization or excuse for not keeping their word. In fact, people systematically deceive themselves about who they have been and what they have done. As Chris Argyris concludes: “Put simply, people consistently act inconsistently, unaware of the contradiction between their espoused theory and their theory-inuse, between the way they think they are acting and the way they really act.” Because people cannot see their out-of-integrity behaviour, it is impossible for them to see the cause of the unworkability in their lives and organizations – the direct result of their own violations of the Law of Integrity. 3. The belief that integrity is keeping one’s word The belief that integrity is keeping one’s word – period – leaves no way to maintain integrity when this is not possible, or when it is inappropriate, or when one simply chooses not to keep one’s word. This leads to concealing not keeping one’s word, which adds to the veil of invisibility about the impact of violations of the Law of Integrity. 4. Fear of acknowledging that you will not be keeping your word When maintaining your integrity (i.e., acknowledging that you are not going to keep your word and cleaning up the mess that results)

Putting the system back in order is deceptively simple: people have to start honouring their word. If they do, trust will materialize almost instantly. The interesting thing about it is that you actually create trust more rapidly if you fail to keep your word but you honour it, because this is always so surprising to people. If you’re straight with people – “I told you that I’d have this report done a month from now, but I know now that I’m not going to be able to and I apologize, but I’ll get it to you in a month and a half. Let’s have a talk about what I can do to clean up the mess I have caused for you.” If I then get the report to you in a month and a half, our relationship will be strengthened; but if I simply don’t keep my original word, trust will be lost. There are great examples of service failures that have turned out positive. In one study by Bitner, Booms and Tetrault [published in The Journal of Marketing], a husband and wife had a reservation for a hotel room. They arrived at the hotel, it was completely filled through no fault of the hotel – people just hadn’t 20 / Rotman Magazine Fall 2009

appears to you as a threat to be avoided (like it was when you were a child) rather than simply a challenge to be dealt with, you will find it difficult to maintain your integrity. When not keeping their word, most people choose the apparent short-term gain of hiding that they will not keep their word. Thus out of fear we are blinded to (and therefore mistakenly forfeit) the power and respect that accrues from acknowledging that one will not keep one’s word or that one has not kept one’s word. 5. Integrity is not seen as a factor of production This leads people to make up false causes and unfounded rationalizations as the source(s) of failure, which in turn conceals the violations of the Law of Integrity as the source of the reduction of the opportunity for performance that results in failure. 6. Not doing a cost/benefit analysis on giving one’s word When giving their word, most people do not consider fully what it will take to keep that word. That is, people do not do a cost/benefit analysis on giving their word. In effect, when giving their word, most people are merely sincere (well-meaning) or placating someone, and don’t even think about what it will take to keep their word. Simply put, this failure to do a cost/benefit analysis on giving one’s word is irresponsible. Irresponsible giving of one’s word is a major source of the mess left in the lives of people and organizations. People generally do not see the giving of their word as: “I am going to make this happen,” but if you are not doing this you will be out-of-integrity Generally people give their word intending to keep it. That is, they are merely sincere. If anything makes it difficult to deliver, then they provide reasons instead of results. 7. Doing a cost/benefit analysis on honouring one’s word Conversely, people almost universally apply cost/benefit analysis to honouring their word. Treating integrity as a matter of cost/ benefit analysis guarantees that you will not be a person of integrity.

checked out as planned. Unfortunately, the front desk staff wasn’t able to find the couple another room in the city, so they failed to keep their word. But they did honour it: they took a small dining room in the hotel, put in some cots and pillows and bedding and made a bedroom out of it. In the end, the family rated this as one of their outstanding service experiences. Honouring one’s word is truly an amazing phenomenon, and my colleagues and I are eager for people to implement it in their lives and in their organizations. As with the Law of Gravity, the end result is guaranteed. Michael Jensen is the Jesse Isidor Straus Professor of Business Administration, Emeritus at Harvard Business School and a senior advisor at The Monitor Group. He is the founder and chairman of the Social Science Research Network, which brings “Tomorrow’s Research Today” to people worldwide. This interview is based on his paper, “Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics and Legality”, co-written with Werner Erhard and Steve Zaffron. The paper can be downloaded at http://ssrn.com/abstract=920625

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We care deeply about what others think of us, and as a result, ‘mattering maps’ exert a powerful influence on our behaviour.

How Mattering Maps Affect Behaviour

FROM ADAM SMITH TO MODERN TIMES,

economists have recognized and explored implications of the idea that human beings care deeply about how we compare to others. The concept of ‘mattering maps’ captures this insight. As Rebecca Goldstein expresses it in the novel from which we adopt the term: The map is a projection of its inhabitants’ perceptions. A person’s location on it is determined by what matters to him: the kind of mattering that produces his perceptions of people, of himself and others; of who are the nobodies and who the somebodies; who the deprived and who the gifted; who the better-never-born and who the heroes. One and the same person can appear differently when viewed from different positions. In principle, there is a mattering map for each person, each social environment and for society as a whole. And because each person 22 / Rotman Magazine Fall 2009

typically belongs to more than one social group – workplace, family, friends – these groups and the mattering maps that apply to them often overlap. One of the most striking properties of mattering maps is the enormous diversity of ‘what matters’ in different settings. Most of the Economics literature dealing with status focuses on variables such as income, wealth, consumption, position in the employment hierarchy or some combination of these. However, these are only a few of the diverse dimensions that matter. What Matters, and Why?

In many, if not most groups, who you are – your skills, appearance, personality, sense of humour – matters more than what you have. Most of these characteristics are somewhat mutable: one can develop skills, attempt to enhance one’s appearance, and try to cultivate an appealing personality and sense of humour, but there

ILLUSTRATION BY EMMANUEL POLANCO, COLAGENE.COM

by George Loewenstein and Karl Moene Illustration by Emmanuel Polanco

are striking individual differences in endowments of these attributes that are difficult or impossible to overcome. At the societal level, the world has seen enormous shifts in what is seen to matter. As Alain de Botton expresses it in Status Anxiety, his wide-ranging treatise on the determinants and consequences of social status: Every society holds certain groups of people in high esteem while condemning or ignoring others, whether on the basis of their skills, gender, physical attributes, ancestry, religion or skin colour. Yet such arbitrary and subjective criteria for success and failure are far from permanent or universal. Qualities and abilities that equate with high status in one place or era have a marked tendency to grow irrelevant or even become undesirable in others. Wealth, he argues, only relatively recently became the most important society-wide dimension of mattering, at the beginning of the 19th century. But even wealth, if examined closely, reveals a diversity of mattering maps: in some social settings, simply possessing wealth – whatever its origin – is sufficient to confer status; in others, you must have earned the wealth yourself. That is, what really matters is your capacity to earn wealth rather than the wealth itself. In still other settings, the best wealth is old wealth – wealth that one did not earn oneself. Not surprisingly, mattering maps exert a powerful influence on how people behave. For example, grades in school reflect the combined effect of aptitude and effort. One can: a) loaf and get good grades, b) work hard and get good grades, c) loaf and get low grades, or d) work hard and get low grades. In schools in which good grades are valued, students admire the ‘naturals’ and despise the hardworking failures. Thus, the social rankings of fellow students might correspond to a)>b)>c)>d). In such an environment, many are likely to loaf and end up in c) even though they prefer b) to c) and would have a good chance of obtaining the preferred result if they worked hard. They don’t, however, because working hard would run the risk of ending up with the least-preferred outcome (d). By loafing, and doing so demonstratively, they preclude the worst of all outcomes (d) and may still have a minor chance of getting to the most preferred outcome (a). More generally, the greater the weight placed on intelligence as opposed to performance (grades), the greater will be the incentive to loaf, because doing so will immunize one from the perception that one is untalented. That is, it is better to loaf and face a minor suspicion that one might be stupid as well than to work hard and remove any doubt. As highlighted in the psycho24 / Rotman Magazine Fall 2009

logical literature on ‘self-handicapping’, such mattering is clearly counterproductive. Within specific subgroups one can observe a remarkable diversity of what matters. Often, but not always, the things that matter to a group are a function of the theme that unites its members. Focusing on groups of undergraduates, for example, one can see that some groups value intelligence, some wealth, some looks, some skills: music students are likely to value musical talent; athletes, athletic prowess. However, even for a particular category, different things can matter to different specific groups. Thus, for some business schools what matters is research productivity – i.e., publications – and for others it is how much consulting one does (and how much money one makes from such consulting.) The reason for the wide variety in mattering is that what comes to matter is highly path-dependent: small differences in the starting conditions of a group can have large and enduring effects on what comes to matter to it. For instance, after a casual night of poker among friends, a few players might decide to bone up on their skills before the next game. Before long, ‘poker skill’ may become a significant feature of the group’s mattering map, even though it wouldn’t have shown up on the proverbial radar screen just a short while before. The Fragility of Self-Esteem

For mattering maps to matter, two conditions must be met. First, people must experience some uncertainty or insecurity about their own self-worth. As envisioned by de Botton, “our ‘ego’ or self-conception could be pictured as a leaking balloon, ever vulnerable to the smallest pinpricks of neglect.” Recent economic models of ‘self-signaling’ capture the insight that people are uncertain about their own strengths and weaknesses – about their objective nature, and about what really matters. According to such models, people engage in certain types of activities and consumption to signal to themselves that they are ‘the type of person’ that would engage in those activities. Very few people are constituted so that they can feel good about themselves while being held in disregard by others; indeed, this is often diagnostic of serious personality disorders such as psychopathy. Second, for mattering maps to matter, it must be the case that we use the evaluations of the people who surround us, at least in part, to resolve uncertainty about our self-worth. That we care about how others perceive us is consistent with a large body of research on self-presentation and with common sense. Indeed, Adam Smith’s entire treatise on human behaviour, The Theory of Moral Sentiments, is premised on the idea that people naturally adopt an attitude toward themselves as others do toward them: The love and admiration which we naturally conceive for those whose character and conduct we approve of, necessarily dispose

Groups exhibit a natural propensity to rank their members – to create a ‘pecking order’ or social hierarchy. When there are dimensions on which people are unequal, these will naturally tend to overshadow dimensions on which they are equal.

us to desire to become ourselves the objects of the like agreeable sentiments, and to be as amiable and admirable as those whom we love and admire the most. Emulation, the anxious desire that we ourselves should excel, is originally founded in our admiration of the excellence of others. A third requirement for mattering maps to matter is that people must exhibit a certain kind of ‘perceptual myopia’: they must pay more attention to the maps of groups that they are part of than to those of groups that they could be part of, but are not. That is, having high or low status within a group that one is part of must have greater impact on one’s self-esteem than simply being aware that one would have high or low status in a group that one is not a part of. This idea is consistent with a wide range of phenomena in closely-related domains. For example, a mainstay of Social Comparison Theory is that people compare themselves to others that are similar to themselves, and research on learning in repeated games shows that learning depends much more on what actually happens to people (called ‘reinforcement learning’) than on what could have happened to them had they played a different strategy (called ‘fictitious play’). Self-Norming of Mattering Maps

Human groups exhibit a natural propensity to rank their members – to create a ‘pecking order’ or social hierarchy. When there are dimensions on which people are unequal, these will naturally tend to overshadow dimensions on which they are equal, if for no other reason than the ease of ranking people. For example, until recently in academia, wages tended to be fairly uniform (and quite low), whereas publications and public prominence was much more variable. This may have created conditions in which publications and prominence were the main things that mattered. More recently, academia has moved to more of a ‘star system’, with large disparities in wages both between fields and between academics within the same field, and naturally, money has started to matter. The problem is that many academics have alternative sources of income, some of which dwarf their earnings from salary, so the change in mattering maps may have increased the incentive for academics to do highly-paid nonacademic work such as consulting and serving as expert witnesses.

There may not always be a consensus among members of a group as to what matters or how to operationalize what matters. Thus, while publications, teaching and grantsmanship all matter for academics, it would not be surprising to find that those who excel on one of these dimensions not only value it most highly, but probably believe that their weighting is shared to a greater extent than it actually is. Prior research suggests that, the more ambiguous the criteria are for what matters, the greater the propensity for people to believe that what they excel in is what matters. In standard Economics, individuals have fixed preferences that they seek to satisfy to the maximum-possible extent given whatever constraints (e.g., on inherited wealth, genetic endowment and economic opportunities) they face. Mattering maps complicate this tidy perspective, in part because things can matter greatly that cannot be bought or sold. Another complication is that mattering maps introduce a new category of action that people can take to maximize their utility. When different things matter in different social settings, rather than attempting to maximize according to what matters in their own immediate social environment, people can move to social settings in which their existing capabilities are valued. Whether it is beneficial for an individual to maximize within a particular social environment or to shift environments depends on a variety of factors. Most obviously, it depends on which of the options provides greater opportunities for enhancement of utility. For example, cosmetic surgery and makeup aside, beauty is relatively immutable. If beauty is what matters in a particular environment (e.g., in Hollywood), people who are unattractive will have little hope of improving their lot and should be motivated to shift environments rather than attempting to enhance their appearance. If moving between social settings is difficult or impossible, people will tend to use the more conventional strategy of maximizing within the constraints set by their environment. Most children, for example, cannot escape their families, and the mattering maps that prevail within those families, for some period of time. However, even when people cannot physically leave a group, they may have some capacity to shift their social identity toward – i.e., identify with – groups that value their strengths. The non-academically inclined child in an academic family, for example, might develop an identity as a musician. Rotman Magazine Fall 2009 / 25

The self-calibrating nature of mattering maps suggests that the utopian ideal of an egalitarian society will be difficult to achieve.

One factor that can deter movement between groups is ‘time discounting’. Moving to another social group often involves a costly investment if one can only develop the characteristics that matter to a group when one is actually part of that group. This aspect forces people to endure a period of low status to improve their position. For example, Native Americans in the United States often live in poverty on reservations but have the opportunity to receive highly-subsidized education if they leave the reservation. Leaving the reservation, however, requires a period of adjustment during which they would be plunged into social settings in which the skills and capabilities they have developed on the reservation would have little, if not negative, value. People will be less likely to endure these costs in exchange for the delayed benefits they are likely to confer, the greater are the costs and the more they ‘discount’ – i.e., care less about – the future. Following are seven phenomena that can be better understood in terms of mattering maps.

When a reference group is limited to co-workers in the same company with similar levels of education, more concern with one’s own rank leads to more local competition to become top-ranked. Thus the absolute value of the wages to the best-paid workers can be reduced as long as they keep their high rank in the local distribution of pay. On the other end of this pay scale, more concern with one’s own rank makes threats to leave the company more credible, implying that the lowest wages in the reference group must be raised in order to retain workers with the lowest rank. This mechanism, first discussed by Robert Frank in his book Choosing the Right Pond, can be viewed as a special case of compensating wage differentials in labour economics. Those who are socially deprived of status must be compensated somewhat and those who are socially rewarded with high status can be ‘taxed’. In either case an obsession with relative standing can paradoxically reduce pay inequality among workers in the same reference group.

1. Externalities

4. Globalization

In 1996, CNN founder Ted Turner proposed that natural human competitiveness could be exploited to increase charitable giving by wealthy individuals by publicizing charitable contributions instead of their wealth – as Fortune Magazine does in its list of the wealthiest Americans. Turner’s proposal led to the creation of Slate magazine’s list of the most generous Americans. Turner’s idea highlights an important insight: different types of mattering maps can produce different types of social costs and benefits. If winning a ‘generosity tournament’ confers social status, ‘competitive altruism’ might counteract competitive selfishness.

In most cases, mattering maps are based on active face-to-face approval and disapproval. In rather immobile societies, as most European countries were until recently, relevant interactions are likely to occur within rather small stable groups. In more mobile societies like the U.S., however, such small, local groups are more fluid, and mattering maps are likely to be based on interactions within larger sections of society. Logically, one might anticipate that trends towards a more economically-and socially-integrated world will shift us further from a local to a more global notion of ‘what matters’. However, the implications of globalization may not be so straightforward: to the degree that globalization poses a threat to identity, it may cause people to embrace their local values even more strongly. The rise of fundamentalism in various parts of the world may represent, in part, a reaction to the atomization of society resulting from the trend toward globalization.

2. The tyranny of small differences

The self-calibrating nature of mattering maps suggests that the utopian ideal of an egalitarian society will be difficult to achieve. While it may be possible to create societies that are more egalitarian materially, it will be much more difficult to create societies that are egalitarian in terms of status. There is, however, a silver lining: to the extent that small differences matter when absolute differences are small, it may be possible to maintain workplace motivation with a relatively egalitarian distribution of wealth. 26 / Rotman Magazine Fall 2009

3. The paradox of equality and local status

5. Subcultures

In The Hot House, Pete Earley’s book about life in a Federal prison, an inmate is released after serving a long sentence, and

put on a plane to his native state. On the way, however, the plane makes a stop-over, where the individual gets into a fight with an airline worker, ending his liberation before he even makes it home. Although it is tempting to say that the same violent nature that got him into prison sent him back, another, not necessarily mutually-exclusive explanation for these events is that, perhaps at some subconscious level, the inmate wanted to return. People develop skills to conform to the mattering maps of their subculture, even when those skills might be counterproductive outside of the subculture. Moreover, those who attempt to change their culture may be met with enormous resistance, given the investment that those already in the system have in the existing mattering map. This seems to be true not only in prisons, but in inner-city American schools, where, it is frequently observed, poorly-performing students often establish a subculture in which academic achievement is negatively valued. 6. Family dynamics

In Born to Rebel: Birth Order, Family Dynamics, and Creative Lives, Frank Sulloway argues, albeit controversially, that the ranks of rebels and of the most creative individuals include very few firstborns. In support of this claim, he draws on an argument very closely related to mattering maps. Unlike many environments, people have no choice about leaving the family environment, at least until a certain age. If individuals’ skills don’t match the mattering map established by their parents (and perhaps by successful first-born children), this can result in enormous stress. Thus, second-borns who follow very-successful first-borns often tend to strike out new territory, as if they want to avoid being measured by the mattering map that the first born is adhering to.

In closing

On matters of morality or any other domain of life, mattering maps coordinate the aims and actions of the disparate individuals who form groups, creating a sense – and indeed the reality – of shared purpose. While mattering maps may represent essential cement that binds us to one another, at the individual level they can serve as concrete blocks that lock us into a grim reality. Long ago, Adam Smith recognized the great misery generated by the solitary pursuit of status. Describing an individual who had played the status game and seemingly won, he wrote: Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquility that is at all times in his power…It is then, in the last dregs of life…that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility...In his heart he curses ambition, and pleasures which are fled forever, which can afford him no real satisfaction. Mattering maps may be a source of misery for some, but given the realities of human nature, they cannot be avoided. In the end, they enable both the greatest accomplishments of the human race when we compete to outdo one-another in endeavours that are constructive, and our greatest follies when we compete over activities that are wasteful or destructive.

7. Revolutions

Revolutions are often interpreted in economic terms as a conflict between the haves and the have-nots. However, an alternative perspective could view revolutions as attempts to change mattering maps. Once a mattering map starts to be questioned, there can be a sort of cascading effect: the more the map is questioned, the less force it has, and the less force it has, the more it is questioned.

George Loewenstein is the Herbert A. Simon Professor of Economics and Psychology at Carnegie-Mellon University. Karl Moene is a professor of Economics at the University of Oslo, where he heads the Research Center on Equality, Social Organization and Performance (ESOP).

This article is excerpted from Understanding Choice, Explaining Behaviour – Essays in Honour of Ole-Jørgen Skog (Oslo Academic Press).

Rotman Magazine Fall 2009 / 27

People tend to evaluate evidence in a selective fashion when they have a stake in reaching a particular conclusion or outcome. By Francesca Gino, Don Moore and Max Bazerman

SEE NO EVIL: WHY WE OVERLOOK OTHER PEOPLE’S UNETHICAL BEHAVIOUR

WITHOUT REALIZING IT, managers delegate unethical behaviour to people in their organization on a regular basis. Think about it: this occurs whenever someone tells their subordinates to ‘do whatever it takes’ to achieve production or sales goals, leaving open the possibility of aggressive or even unethical tactics; it happens when companies outsource production to offshore subcontractors that are inexpensive because they are less constrained by costly labour and environmental standards; and it happens when partners at accounting firms remind junior auditors about the importance of retaining a client that has inappropriate accounting practices. In these and countless other situations, individuals are motivated to overlook the problematic ethical implications of other people’s behaviour. The result: in recent years, scandals have cost the owners, investors, and employees of firms such as Enron, WorldCom and Arthur Andersen trillions of dollars. In our view, these and other scandals would never have occurred if leaders and employees within these firms had taken note of the unethical behaviour of their colleagues. Psychologists have known for some time that people who have a vested self-interest in a particular situation have difficulty approaching that situation without bias, even when they view themselves to be honest. In other words, when Party A has an incentive to see Party B in a favourable light, Party A will have dif-

ficulty accurately assessing the ethicality of Party B’s behaviour. Unfortunately, this fact is regularly ignored by those who design organizations and regulatory structures. Similarly, when discussing the conflict between what managers are obligated to do versus what they are individually rewarded for doing, the media frequently presents such decisions as intentional, conscious choices, overlooking the role of unconscious bias. In an example from the world of sports, Barry Bonds recently surpassed Hank Aaron to become the all-time leader in career home runs – perhaps the most valued record in Major League Baseball (MLB). However, many people now question whether Bonds’ performance truly surpasses that of Aaron, given allegations that Bonds used steroids or hormones to enhance his physique. Far more interesting, in our view, is the failure of the MLB commissioner, the San Francisco Giants team and the players’ union to investigate the rapid changes in Bonds’ physical appearance, his enhanced strength and his increased power at the plate when they occurred. Because the MLB and the players’ union benefited (at least in the short-term) from the steroid use of players such as Bonds, this interest prevented them from taking action on the issue for at least a decade. A much more serious threat to our society comes from the incentives of auditors to please their clients. Accounting firms have Rotman Magazine Fall 2009 / 29

Humans are biased to selectively see evidence supportive of the conclusion they would like to reach, while ignoring evidence that goes against their preferences or subjecting it to special scrutiny.

numerous motivations to view their clients’ books in a positive light, including the auditing and consulting fees they receive from the hiring companies. Thus, auditors face a conflict between acting in their own self-interest and acting ethically. In a 2002 study, researchers tested the strength of this conflict of interest by giving participants a complex set of information about the potential sale of a fictional company. The participants’ task was to estimate the company’s value. Each was assigned to a different role: buyer, seller, buyer’s auditor, or seller’s auditor. All participants read the same information about the company, including information that could help them estimate the firm’s worth. After reading about the company, auditors provided estimated valuations of its worth to their clients. As the literature on self-serving biases would predict, sellers submitted higher estimates of the company’s worth than prospective buyers. Even more interesting, the ‘auditors’ who were advising either the buyer or the seller were strongly biased toward the interests of their clients: the sellers’ auditors publicly concluded that the firm was worth more than did the buyers’ auditors. Researchers then asked the auditors to estimate the company’s true value, as assessed by impartial experts, and told the auditors that they would be rewarded for the accuracy of their private judgments. Auditors who had been serving sellers reached estimates of the company’s value that, on average, were 30 per cent higher than the estimates of auditors who served buyers. It appears that, due to the influence of self-serving biases, participants assimilated information about the target company in a biased way. As a result, they were unlikely to provide accurate and unbiased estimates when their private judgments were submitted. This study suggests that even a purely hypothetical relationship between an auditor and a client distorts the judgments of those playing the role of auditor. It seems likely that a longstanding relationship that involves many thousands or even millions of dollars in ongoing revenues would have an even stronger effect. This is consistent with broader research suggesting that people evaluate evidence in a selective fashion when they have a stake in reaching a particular conclusion or outcome. Basically, humans are biased to selectively see evidence supportive of the conclusion they would like to reach, while ignoring evidence that goes against their preferences or subjecting it to special scrutiny. While some scholars have suggested that professional auditors might be less subject to these biases due to their 30 / Rotman Magazine Fall 2009

special training and knowledge, research has found professionals to be vulnerable to the same biases that affect novices. Consider the case of Enron, the most famous business collapse of our time. How was it possible for Arthur Andersen, Enron’s auditor, to vouch for the firm’s financial health during the time that Enron was concealing billions of dollars in debt from its shareholders? Arthur Andersen had strong reasons to be afflicted by ‘motivated blindness’. First, having earned millions from Enron ($25 million in auditing fees and $27 million in consulting fees in 2001), Andersen was motivated to retain and build on these lucrative contracts. In addition, many Andersen auditors hoped to be hired by Enron, as a number of their colleagues had been. Cases such as this shed light on an important weakness of the current auditing system: it allows motivated blindness to thrive. The Slippery-Slope Effect

Research on visual perception shows that people frequently fail to notice gradual changes that occur right before their eyes. In one study investigating change detection, an experimenter holding a basketball stopped pedestrians to ask for directions. While the pedestrian was in the process of giving directions, a group of confederates walked between the experimenter and the pedestrian. As the group was passing by, the experimenter handed the basketball to one of the confederates. Once the pedestrian was done giving directions, the experimenter asked her if she noticed any sort of change while she was talking. Most pedestrians generally did not notice any change. However, when they were asked directly about a basketball, many recalled it, and some even recounted specific characteristics of the ball. So, while the participants failed to explicitly notice that a change took place, it was possible that they could have done so, had they been more attuned to it. Other types of changes also go unnoticed, leading to important decision-making errors with ethically-relevant consequences. Investigating the implications of ‘change blindness’ for unethical behaviour, researchers showed that individuals are less likely to notice others’ unethical behaviour when it occurs in small increments than when it occurs suddenly, suggesting that ‘bounded awareness’ extends from perceptual processes to decision-making processes in ethically-relevant contexts.

This work was motivated by the intuitive concept of a ‘slippery slope’, which predicts that decision makers are less likely to notice small changes in behaviour and to code them as unethical than they are to notice and code a dramatic change as unethical. This theory can be used to explain real-world examples of unethical behaviour, such as that of some auditors. Suppose that an accountant with a large auditing firm is in charge of the audit of a company with a strong reputation. For three consecutive years, the client’s financial statements were extremely ethical and of high quality. As a result, the auditor approved the statements and had an excellent relationship with the client. This year, however, the company committed some clear transgressions – stretching and even breaking the law in certain areas. In such a situation, the accountant likely would refuse to certify that the financial statements were acceptable according to government regulations. By contrast, what would happen if the corporation stretched the law in a few areas one year, but did not appear to break it? The auditing firm might be less likely to notice these transgressions than in the former scenario. Now suppose that the next year, the firm stretches the ethicality of its returns a bit more, committing a minor violation of federal accounting standards. The following year, the violations are a bit more severe. The year after that, the auditing firm might find itself facing the type of severe violations described above, where the client crosses the ethical line abruptly. Based on the evidence, we believe auditors would be more likely to notice and refuse to sign the statements in the first version of the story than in the second one, even if the unethical behaviour is the same in the last year described in both scenarios. This suggests that recent scandals illustrate the ‘boiling frog syndrome’: according to this folk tale, if you place a frog in a pot of hot water, it will jump out; but if you put the frog in a pot of warm water and raise the temperature gradually, by the time the frog realizes that it is too hot, it will be cooked. Like the frog, many of us fail to notice gradual changes in unethical behaviour, and this is true in part because our bounded awareness leaves us better equipped to notice abrupt rather than gradual changes. There’s No Problem – Until Something Bad Happens

People have a tendency to evaluate unethical acts only after the fact – once the behaviour has resulted in a bad outcome, but not during the decision process. To test this statement, read the following two scenarios and we will then ask you to assess the behaviour in each. Scenario 1:

A pharmaceutical researcher defines a clear protocol for determining whether or not to include clinical patients as data points in a study. He is running short of time to collect sufficient data points for his study within an important budgetary cycle within his firm. As the deadline approaches, he notices that four subjects were

withdrawn from the analysis due to technicalities. He believes that the data in fact is appropriate to use, and when he adds those data points, the results move from not-quite statistically significant to significant. He adds these data points, and soon the drug goes to market. This drug is later withdrawn from the market after it kills six patients and injures hundreds of others. Scenario 2:

An auditor is examining the books of an important client, a client that is not only valuable for their auditing fees, but also buys lucrative advisory services from the auditor’s firm. The auditor notices some accounting practices that are probably illegal, but it would take multiple court cases to be sure about whether the action was legal or not. The auditor brings up the issue with the client, who insists that there is nothing wrong with their accounting. The client also threatens to withdraw their business if the auditor withholds approval. The auditor agrees to ‘let it go’, and encourages the client to change their practices over the next year. Six months later, it is found that the client was committing fraud, the corporation goes bankrupt, the bankruptcy is connected to the issue that the auditor noticed, and 1,400 people lose their jobs and their life’s savings. Question: How unethical did you find the actions of the pharmaceutical researcher and the auditor to be? Before you answer, consider the following (related) stories. Scenario 1a:

A pharmaceutical researcher defines a clear protocol for determining whether or not to include clinical patients as data points in a study. He is running short of time to collect sufficient data points for his study within an important budgetary cycle within his firm. He believes that the product is safe and effective. As the deadline approaches, he notices that if he had four more data points for how subjects are likely to behave, the analysis would be significant. He makes up these data points, and soon the drug goes to market. This drug is a profitable and effective drug, and years later shows no significant side effects. Scenario 2a:

An auditor is examining the books of an important client, a client that is not only valuable for their auditing fees, but also buys lucrative advisory services from the auditor’s firm. The auditor notices clearly-fraudulent practices by the client. The auditor brings up the issue with the client, who insists that there is nothing wrong with their accounting. The client also threatens to withdraw their business if the auditor withholds their approval. The auditor agrees to ‘let it go,’ and encourages the client to change their accounting practices over the next year. No problems result from the auditor’s decision. Rotman Magazine Fall 2009 / 31

Imagine that you had only read Scenarios 1a and 2a, and not 1 and 2. How would you have reacted? We asked a group of participants to read the first two scenarios, and a second group to read scenarios 1a and 2a. The results showed that people were more critical of the researcher and the auditor in scenarios 1 and 2 than of those in 1a and 2a. Specifically, people rated the behaviour described in 1 and 2 as ‘more unethical’ than that described in 1a and 2a, and said that such behaviour should be punished more harshly. Yet, if you compare scenarios 1 and 1a, it is clear that the pharmaceutical researcher’s behaviour was actually more unethical in scenario 1a, and the same holds true for scenario 2. We confirmed this intuition by asking participants to rate the ethicality of the actions described in all four scenarios without giving information about the outcomes. A different group of participants read the stories described in scenarios 1 and 2, while a second group read the stories described in 1a and 2a. As expected, participants rated the actions described in the latter scenarios as more unethical than those described in scenarios 1 and 2. Why do people exposed to the full versions of scenarios 1 and 2 judge these decision makers more harshly than the decision makers in 1a and 2a? The answer may lie in what has been called the ‘outcome bias’: the tendency to take outcomes into account, in a manner that is not logically justified, when evaluating the quality of the decision process that an individual used. People tend to judge the wisdom of decision makers, including medical decision making and simple laboratory gambles, based on the outcomes they obtain. Bringing this research into an ethical context, we propose that people too often judge the ethicality of actions based on whether harm follows, rather than on the ethicality of the choice itself. We replicated the results from these studies with a different set of scenarios and subjects design, and consistent with the results described above, we found that even when participants have seen and rated the ethicality of a decision prior to learning its outcome, their opinions change when they learn the outcome. One problem with this pattern is that it can lead us to blame people too harshly for making sensible decisions that have unlucky outcomes. In another sphere, we see a connection between the outcome bias in ethical contexts and research on identifiable victims . The ‘identifiable victim effect’ suggests that people are far more concerned with and show more sympathy for identifiable victims than statistical victims. Simply indicating that there is a specific victim increases caring, even when no personalizing information about the victim is available. Similarly, on a psychological continuum, the same unethical action could harm an identifiable victim, an unidentifiable victim, or no victim at all. We predict that people see more unethicality when identifiable victims are affected than when victims are statistical, and that even weaker perceptions of unethicality will occur when there are no victims. One fascinating example of this prediction comes from academia. The Chronicle of Higher Education has documented that at many top-tier universities, the leading form of affirmative action is ‘legacy admits’ – the policy of admitting sub-par children of alumni, donors and other well-connected individuals. The obvious consequence of 32 / Rotman Magazine Fall 2009

such policies is that elite institutions end up favouring unqualified, less-capable applicants from privileged social groups over more-qualified, unconnected applicants. Amazingly, this racist and elitist behaviour has been largely ignored for decades. Even today, very few have raised their voices in objection to legacy admits. We believe that the lack of concern over this ethically-questionable practice results from a combination of two factors: the difficulty in identifying the victims (those who are denied admission) and a lack of perception that the practices cause harm. In essence, even when we do recognize the negative outcome of unethical behaviour, we are often dulled by the lack of vividness of the harmful outcomes. In closing

The evidence strongly supports the notion that most people value ethical decisions and behaviour and strive to develop the habit of ethicality. Nevertheless, people still find themselves engaging in unethical behaviour because of biases that influence their decisions – biases of which they may not be fully aware. This is true in part because human ethicality is ‘bounded’: psychological processes sometimes lead us to engage in ethically-questionable behaviour that is inconsistent with our own values and beliefs. As we have discussed, human awareness is also bounded: unconsciously, our minds imperfectly filter information when dealing with ethically-relevant decisions. As a result of these limits, we routinely ignore accessible and relevant information. Deliberative, systematic thought in ethically-relevant contexts is insufficient to avoid unethical decisions, judgments or behaviours. The clarity of evidence on bounded awareness and bounded ethicality places the burden on business schools to make students aware of the possibility that even good people will sometimes act unethically without their own awareness. Organizational leaders must understand these processes and make the structural changes necessary to reduce the harmful effects of our psychological and ethical limitations. Our legal system requires evidence of intent in order to prove someone guilty of wrongdoing; fraud, for instance, usually requires that an individual knew that a statement was false when he made it. We believe that executives should face an even higher hurdle: they should be held responsible for the harms that their organizations predictably create, with or without intentionality or awareness.

Francesca Gino is an assistant professor of

Organizational Behaviour at the University of North Carolina’s Kenan-Flagler Business School. Don Moore is an associate professor of Organizational Behaviour at Carnegie Mellon University’s Tepper School of Business. Max Bazerman is the Jesse Isidor Straus Professor of Business Administration at Harvard Business School. The preceeding is excerpted from Social Decision Making: Social Dilemmas, Social Values and Ethical Judgments (Routledge 2009), a tribute to the career of business ethics pioneer David Messick (see interview, page 74.) Reproduced by permission of Taylor and Francis Group, LLC, a division of Informa plc.

by Francis Flynn and Scott Wiltermuth

People often overestimate the degree to which others share their views, and there are implications for ethical decision making.

WHO’S WITH ME? FALSE CONSENSUS AND ETHICAL DECISION MAKING

ETHICAL STANDARDS ARE DERIVED from socially-agreed upon principles and values and vary across institutions and national cultures. Ethical decision making can thus be understood as a problem of social judgment – of determining where the majority of others stand on issues of moral concern. For example, within organizations, employees are motivated to appear ethical in the eyes of their peers and often rely on judgments of ‘what others would do’ to guide their decision making. As a result, having an accurate view of others’ moral positions is critical. But can individuals accurately judge others’ opinions on matters of ethics? In this article we will show that the tendency to project our opinions can alter our views about what others think is ethical, in some cases giving us a sense of being in the majority even when we are not. The upshot of this ‘false consensus effect’ is clear: if

people erroneously assume that their judgments are in line with the prevailing view, they may feel emboldened to act and only learn of their misjudgment when it is too late to avert the consequences. The False-Consensus Bias

Research has consistently found that people’s own habits, values and behavioural responses bias their estimates of the commonness of the habits, values, and actions of the general population. People who are shy, for example, tend to believe that more people are shy than do those who are gregarious. We propose that this bias can play a critical role in ethical decision making by influencing how individuals see their decisions in relation to how others view the same decisions. Rotman Magazine Fall 2009 / 35

Human beings are social creatures that possess a fundamental drive to evaluate their attitudes and opinions in relation to those of others. When prompted to make social comparisons, people tend to see their choices and attitudes as being consistent with others’ choices and attitudes, which, in turn, leads them to interpret their actions and beliefs as ‘common and appropriate’. Conversely, the same people will see alternative responses (particularly those that are directly opposed to their own) as deviant, uncommon or inappropriate. A central premise of most theoretical models of morality is that people are motivated to make moral judgments and to avoid making immoral ones. We propose that when the ethical course of action is ambiguous (i.e., dilemmas in which one ethical principle stands opposed to another), people will be inclined to see their action as normative (i.e., acceptable) rather than deviant. The Role of Network Centrality

Members of organizations that have greater ‘network centrality’ – that is, larger social networks – have been shown to have more influence over their peers, receive better performance reviews from their superiors, and be more satisfied with their jobs than those who are less central. But how does network centrality affect ethical decision making? Those who occupy central positions in social networks tend to have more access to information from their peers, and given this advantage, one might expect that network centrality would provide greater insight into a group’s implicit, socially-shared ethical standards. If this is correct, employees who occupy central network positions should be more accurate in estimating others’ ethical judgments than are those who occupy less-central positions. According to some scholars, more-centrally located employees are less likely to perform immoral acts, because being ‘well known’ makes their behaviour more visible and increases potential damage to their reputation. According to others, the effect of network centrality on ethical judgment is a matter of social influence rather than reputation: to the extent that a focal individual is connected to many unethical colleagues, network centrality will likely be a strong predictor of unethical behaviour. This is because centrally-located individuals tend to be susceptible to social influence in developing their personal attitudes. This ‘social influence view’ assumes that individuals come to reflect the moral attitudes and ethical judgments of their peers through the sharing of advice and opinions. A more cautious view would suggest that everyday conversations cannot influence 36 / Rotman Magazine Fall 2009

employees’ ethical judgments in a meaningful way, but that they might inform employees about others’ moral attitudes (i.e., “I am aware that the majority of my peers holds a view that is different from my own.”). The problem is that in the realm of human interaction, people tend to affirm what they have in common, thereby reinforcing a sense of shared attitudes and beliefs. In general, people are inclined to talk about ‘safe’ subjects – sports, kids, entertainment, current events – rather than uncomfortable topics such as politics, religion and morality. Likewise, research on organizational communication suggests that managers ‘undercommunicate’ when it comes to discussing uncomfortable topics such as rumoured mergers or other potentially-adverse events. Indeed, little of the information that employees gain from their network ties might apply to personal bases of moral judgment because people are loath to discuss their moral values openly; in many environments, such discussions seem almost taboo. Although employees may be reluctant to discuss moral quandaries with their colleagues, those who are centrally located in a social network might still feel confident that they understand their colleagues’ views on moral issues. Social ties (i.e., relationships based on helping and advice giving) elicit a sense of rapport – a deeper understanding of an individual’s professional, social, political and to some extent, personal attitudes. Individual co-workers, particularly those that are centrally located, may not need to discuss ethical dilemmas frequently in order to feel assured that they know how their colleagues would react in a given circumstance. That is, people with more central positions in a network may not necessarily be more accurate in judging their colleagues’ ethical views, but they may nevertheless feel more confident that their judgments are accurate. As a result, for centrally-located individuals, estimates of how their thoughts and actions align with those of their colleagues may become exaggerated. Thus, we propose an idea that is both provocative and counterintuitive: people who are more connected to others may be even more prone to the False-Consensus Bias than their less-connected peers. For well-connected individuals, the tendency to avoid moral discourse and instead discuss superficial connections might actually worsen this bias in ethical judgments, providing an illusion of consensus where none exists. Our Research

We recently tested our ideas by collecting judgments of ethical

PEOPLE WHO ARE MORE ‘CONNECTED’ MAY BE EVEN MORE PRONE TO THE FALSE-CONSENSUS BIAS THAN THEIR LESS-CONNECTED PEERS.

decision making in the workplace from MBA students, executives enrolled in a Masters of Management program, and employees in the marketing department of a manufacturing firm. We asked each participant to consider several scenarios featuring ethical dilemmas and to provide their opinion about whether the actions described were ethical and what percentage of their colleagues held the same view. We also collected data from each participant describing their social networks – specifically, who amongst their colleagues they would go to for help and/or advice. In addition to collecting individual responses about the decision made in each scenario, after reading six hypothetical dilemmas, participants were asked, What percentage of people within your department/class would share your opinion about the ethicality of this decision? Participants could provide any number ranging from zero to 100 in response to this question. For each participant, we calculated the actual level of agreement for each of the six dilemmas by computing the percentage of others within that individual’s class or department who made the same choice as the focal participant. In other words, if a participant classified a particular decision as unethical, ‘actual agreement’ was defined as the percentage of others within the class or department who also classified that decision as unethical. In order to construct two measures of the participants’ social networks, we first asked people to report who they go to for help and/or advice: ‘in-degree centrality’ entails a count of the number of ties to the focal individual (i.e., the number of other individuals from whom one receives advice). In essence, this is the size of one’s

network – how many people one knows and trusts enough to turn to. We also measured ‘betweenness centrality’ – the expansiveness of the individual’s network, or how well-connected the individual is. In a social network, betweenness centrality captures the influence that an individual has over the spread of information through the network. We wanted to investigate whether individuals who occupy an advantageous position within a network are more or less overconfident in their estimates of others’ ethical views. Our Findings

We expected that participants who were asked to judge the ethicality of a decision would demonstrate the False-Consensus Bias by assuming that others made choices similar to their own, and consistent with our hypothesis, people holding one view of the ethicality of a decision estimated the popularity of that view to be higher than did those not holding that view. While the presence of the false-consensus effect does not necessarily indicate that an individual believes that he or she is in the majority, it is nevertheless worth noting that for all six dilemmas in each of our three samples, participants who were in the minority camp estimated that the majority of their peers (i.e., greater than 50 per cent) held the same view as they did. We did not expect that people whose ethical judgment was in line with the majority view would overestimate the degree to which others held their beliefs, and indeed, people who held the majority view did not consistently overestimate consensus, overestimating the popularity of their response in only two of Rotman Magazine Fall 2009 / 37

OUR FINDINGS CHALLENGE THE NOTION THAT MORE-CENTRAL INDIVIDUALS IN A SOCIAL NETWORK ARE LESS LIKELY TO VIOLATE ETHICAL STANDARDS.

six dilemmas in each of our samples. In fact, for some dilemmas, those holding the majority view showed evidence of under-estimation, which is consistent with other research. Consistent with our prediction, the more advice-receiving ties an individual had, the higher the estimated level of agreement. It is important to note that although these estimates might appear inflated, they are not necessarily incorrect: people with more central locations in a social network may estimate that more people agree with them on moral issues because people actually do agree with them on moral issues. However, even when we controlled for the actual level of agreement, we found strong evidence that people, and particularly those in the minority, tend to overestimate agreement with their peers on ethical issues. An alternative explanation for our results could be that people with higher levels of network centrality accurately estimated agreement among those individuals with whom they have close ties, but not among the entire group. To test this possibility, we calculated another measure of actual agreement using only the responses from a focal participant’s set of confirmed ties (described above). We then ran a separate model using this alternative measure of actual consensus within a focal individual’s advice network. One might read these results and wonder if they apply to individuals whose ethical judgment was inconsistent with the majority view (i.e., less than 50 per cent of their colleagues or classmates agreed with their choice), given that the potentially-negative consequences of False-Consensus Bias in ethical decision making pertain mainly to those who hold the minority opinion. Indeed, the results were even stronger when we consider the responses of 38 / Rotman Magazine Fall 2009

those individuals whose views differed from the prevailing view. Network centrality positively correlated with evidence of false consensus for participants in the minority. Being better connected did not help these individuals accurately estimate whether their opinions were out of step with the majority of their peers. Our findings challenge the notion that more-central individuals in a social network will be less likely to violate shared ethical standards. Instead, we would argue that being ‘better connected’ may actually put people in a dangerous position when determining what they think they should do and whether this action will be in line with the prevailing opinion or ethical standard. When responding to an ethical dilemma, having more expansive advice networks with one’s colleagues (co-workers, peers) increases a focal individual’s estimate of agreement with these same colleagues, significantly above and beyond any actual increase in agreement. In short, individuals who are more centrally located, including those who hold the minority view, show greater evidence of overconfidence that their ethical judgments are in line with the majority of their colleagues. Given all the recent turmoil in the business world, research on ethical decision making has become increasingly focused on the psychological drivers of bad behaviour. We add to this growing field of research by highlighting the influence of the FalseConsensus Bias and suggesting that social projection plays a critical role in employees’ ethical judgments. Another contribution of our research is the link we found between false consensus and social networks. Part of what shapes individuals’ understanding of social norms, or consensus views, is their set of social relations. One might reasonably expect that

individuals with greater network centrality would be less vulnerable to False-Consensus Bias because they are more closely connected to other members of their referent group and enjoy an information-based advantage. That is, by being ‘well-connected’, centrally-located actors are in a better position to acquire insight on other actors’ general attitudes and preferences. However, we found that overestimating social support (in the form of agreement) in ethical judgment can be exacerbated by having more expansive advice networks. This finding extends previous work on ethics beyond matters of individual morality and social influence, refocusing attention on the problem of social judgment in ethical decision making. If ethical decision making is to account for socially-shared standards, then accuracy in judging others’ moral views takes on greater importance. Noting this, theorizing about ethical decision making in organizations should account for cognitive biases in social projection and how an individual’s social context can accentuate these biases. Rather than assume that social connectivity is an effective means of social calibration, we must consider whether such connectivity can also breed a strong sense of overconfidence. Implications for Managers

Overestimating support for one’s judgments can lead to costly decision-making errors. In the recent past, a slew of ethical violations in business has been featured in the popular press. These acts often seem puzzling because they appear in stark contrast to popular views of appropriate behaviour. After hearing about one ethical breach or another, many casual observers wonder, What could these people have been thinking? Did they completely disregard moral concerns, or did they actually believe their actions were in line with public standards of proper conduct? Our results suggest the intriguing possibility that some people who perform unethical acts may in fact be confident that their actions are ethical because they hold a false expectation that others share their views. One intuitive solution to the problem of faulty social projection would be to develop more expansive social networks, thereby developing a more central position for oneself. However, our findings suggest that this solution might have the opposite effect – worsening an individual’s estimates of others’

agreement with their choices. If having an advantageous network position does little to immunize people against false consensus, ethics scholars need to account for this problem in offering advice to practitioners. An individual’s true ability to anticipate how others will react to her ethical choices likely corresponds to the content of her interpersonal conversations rather than the centrality of her network location. Advice ties undoubtedly provide insight, but such insight is limited to what people discuss or what they can easily observe. Unfortunately, moral attitudes are often clandestine and therefore require further investigation. In closing

Members of organizations are naturally motivated to consider the attitudes and opinions of their peers in order to gauge others’ reactions to their decisions and assess where they stand relative to organizational norms. However, we found strong evidence that people are not very good at estimating the percentage of others who agree with their choices. Specifically, people fall victim to a False-Consensus Bias, wanting to believe that others are more like them than not. Ethical pundits may predict that ‘loners’ would be more likely to violate ethical standards because they lack insight into others’ attitudes and have fewer colleagues to whom they can turn for help or advice. However, our research suggests that the social butterfly, rather than the social outcast, may actually be more likely to erroneously assume that their ethical judgments are in line with the normative view. And as we have seen, the end-results can be widespread and severe.

Francis Flynn is an associate professor of

Organizational Behaviour at Stanford’s Graduate School of Business. Scott Wiltermuth is a PhD candidate in Organizational Behavior at Stanford. Rotman Magazine Fall 2009 / 39

Where does accountability start? It starts with you, as soon as you open your mouth for the purpose of voicing a word. by Mihnea Moldoveanu

The Promise: The Basic Building Block of Accountability ACCOUNTABILITY HAS BECOME a major buzzword of late, cited to be at

the core of market meltdowns and revivals, and one of the basic buildings blocks of successful businesses. As a result, it has become a topic of investigation by a large coterie of consultants, social scientists and practitioners. Break the riddle of accountability, the thinking goes, and you will have solved one of the thorniest issues in modern business. In spite of the intellectual cornucopia developing around accountability – from pay-for-performance to management by objectives to self-discovery and ‘empowerment’ in its various guises – we are no closer to solving the fundamental problem than we were when Plato transcribed Socrates’ sallies in the Agora. This, I argue, is because most of the proposed approaches focus narrowly on tasks, responsibilities, personal attributes and measurement

systems – all of which are important aspects of accountability, but overlook its most important features: its relationality, reflexivity and relativity. Accountability is relational in that it involves a promise or commitment from me to you; it is reflexive in that it says something about me and about our relationship that I have to internalize and accept; and it is relative to a set of background assumptions and a background audience – made up of those who can witness my commitment to you and those who cannot, but could. The I-Thou Interaction

The basic building block of accountability is an act so complex that only humans can commit it: the promise. A promise is a speech act that is much more than just oral noise: it is oral noise Rotman Magazine Fall 2009 / 41

Figure One

The I-Thou-They-Them-Those Universe

Those (hypothetical) Them (not present) They (present)

Behavioural

I

Thou

Behavioural

Visceral

Visceral

Affective

Affective

Discursive

Discursive

that binds one to a course of action. The analysis of accountability proposed here focuses squarely on this speech act as the most important feature of organizational life, and on the promise as the basic building block of accountability. When am I accountable? I am accountable to you for carrying out some action to which I have committed by promising to carry it out. We should not confuse being accountable with being responsible. Accountability is broader: it envisions that I may not fulfill the promise but, in that case, it demands that I produce a satisfactory account of why I have not. How we handle broken promises is every bit as important to the quality of a culture as is the raw score of kept vs. unkept promises. The basic unit of analysis of a promise is ‘the I-Thou interaction’, which unfolds on four distinct planes: 1. Behavioural: which behaviours, including verbal behaviours, do we produce toward each other when I make the promise and you accept it? 2. Affective: what sentiments or feelings do we feel and express towards each other when I make the promise and you accept it? 3. Visceral: what raw feels and sensations do I express and understand you to express when I make a promise and you accept it? 4. Discursive: what thoughts and beliefs do I express and understand you to express in the context of the interaction? What reasons and arguments do we put forth towards each other? 42 / Rotman Magazine Fall 2009

Planes of being toward or being with

Promises work on all four planes simultaneously. If I promise to deliver a document to you by tomorrow at 5 pm, but I do so with a snicker that belies my commitment, you will have reason to doubt my words. If you show this doubt to me, I have reason to doubt that you accepted my promise, and may feel ‘freed’ in some way from carrying it out. If I promise to release the quarterly earnings on time, but display mockery and disgust at the theatricality of the whole interaction with shareholders, analysts and pundits, then you have reason to doubt my authenticity and the veracity of my promise. You may even proceed to create your own earnings report, just in case I fail to fulfill my promise, leaving me feeling betrayed when I do produce the report. The Role of ‘The Others’

Within organizations, the ‘I-Thou dyad’ described above does not live in a vacuum. It is embedded inside three additional layers of interactions, which are ordered according to immediacy and directness: • They comprises the people that are direct witnesses to my promise, providing an audience and a forum for resolving disputes. They could be the members of an executive team, a board of directors or a product design team who all have direct access to the speech act that gave rise to the promise; • Them comprises those that are known to both parties, are not

Promising to produce a difficult-toobserve change ‘at some point in the future’ is not a promise at all, because it has not specified an ‘event’.

direct witnesses to the interaction, but could provide a ‘third opinion’ if called upon to do so. Examples include absentee team members and mutual friends and acquaintances. Them will typically be known to both I and Thou, will know both I and Thou, and both I and Thou will know that them knows both I and Thou; • Those comprises ‘ideal observers’ – more rational, aware beings that could be invoked by either party as a hypothetical witness – or a cultural archetype that embodies what ‘most people’ would do or think about the interaction. Those could also be an unbiased but still-hypothetical third party that could be invoked as part of a calling-to-account or a reason-giving enterprise to adjudicate between us in case of a disagreement. The Promise Itself

The stage is now set for us to analyze the promise itself. The four planes of an interaction described above allow us to consider typical accountability episodes in a unified fashion, by examining the varied promises, reasons, sentiments and beliefs that exist on the ‘stage’ on which the I-Thou interaction unfolds, and who comprises They, Them and Those in the forms of audiences, arbiters and adjudicators. The framework works as follows: whenever I and Thou exchange energy in the form of oral noise, the sense in which I is accountable to Thou (or, vice-versa) will be defined and examined with respect to the mutual expectations within the dyad that the interaction sets up and the match or mismatch between the induced expectations and the individual’s self-attribution of accountability for fulfilling them, which in turn is analyzed with respect to the expectations that the interaction sets up for They, Them and Those, and as a function of the causal powers that TheyThem-Those have in the context of the dyad. What emerges is a plenary sense of ‘accountability’ that embraces the reciprocal (IThou), relational (I-They, I-Them, I-Those) and reflexive (I-I, Thou-Thou) dimensions of the phenomenon. As indicated, the prototypical accountability scenario uses as the starting point the making of a promise (by I to Thou). The following analysis aims to make clear the role that the protagonists (I-Thou-They-Them-Those, or ‘IT4’) and the planes of their interaction (behavioural-affective-visceral-discursive, or ‘BAVD’) take on in determining the presence and legitimacy of accountability assignments. Step 1: Making a promise.

I makes a promise to Thou. The promise is genuine if it is a cred-

ible undertaking to bring about a particular event at a particular time, such that I and Thou can both ascertain whether or not the event has occurred, as can They, to the hypothetical satisfaction of Them and Those. An ‘event’ entails a change in the property of a substance at a specified time. A common pitfall of accountability interventions is to overlook the power of promissory language to equivocate by causing confusion. Promising to produce a difficult-to-observe change ‘at some point in the future’ is not a promise at all, because it has not specified an ‘event’. In addition, not all promises actually promise: some are not genuine, others are inauthentic, and some are self-refuting (‘I promise to stop making promises’). In all such cases, the promise is not credible. We need a model of a real promise: in making a real promise, I produces behaviour and evinces feelings and sensations that persuade both Thou and They that the promise is authentic, in the sense that by making it, I binds himself to a commitment to bring about the promised event, and, that both Them and Those would be persuaded that the promise is authentic had they witnessed I’s commitment. Step 2: Accepting the commitment embodied in the promise.

If there are no incongruities between I’s words, body language, thoughts, feelings and raw feels that Thou can discern – which might lead Thou to doubt the authenticity of I’s commitment – Thou accepts I’s promise. Accepting a promise is not a trifle, and most people will correctly feel that they have ‘un-committed’ themselves if their promise is not duly acknowledged and accepted in the right tone, with the right facial expression and the right words that jointly signal that Thou has accepted the promise at its face value. If acceptance of a promise by Thou is authentic and genuine, I will recognize this, and Thou will know that I knows this, either on account of I signaling this to Thou, or of Thou independently ascertaining it. I is thereby accountable to Thou for the promise made. Step 3: Anticipating the breach of a promise.

Assume that, for some reason unknown to I at the time he made the promise, he will not be able to live up to his word. ‘Anticipatory breach’ is very much part of our model of promises, for it is there, as much as in any other part of the promising enterprise, that credibility and commitment are made and un-made. I realizes, before the promise comes due that he will not be able to keep it, for reasons that either were unexpected but could have been foreseen (by only I himself; only Thou himself, They alone, Them alone, Those alone, any subset of the above, or all together) at the time the Rotman Magazine Fall 2009 / 43

promise was made and accepted; or, were unexpected and unforeseeable by anyone at the time the promise was made. In this case, I has to decide whether or not to inform Thou of the upcoming impasse, whether or not to take responsibility for the failure of foresight, and what account (if any) to give to Thou or They for the failure of foresight. If, for instance, the decision could not have been foreseen by anyone except Thou at the time the promise was made, then I may be justified (in the eyes of They, Them, Those) in not taking responsibility for the failure of foresight (although I is still ‘on the hook’ for forewarning Thou about the upcoming breach of his promise); and in giving an account that makes Thou at least co-responsible with I for the failure of foresight. Because many of us promise more than we can deliver with alarming frequency, the realm of anticipatory breach is quite often where executives and the cultures they create make or break their accountability fabric. The difference between a flake and a responsible person cannot be ascertained in a one dimensional ‘score’ of kept vs. un-kept promises: it also involves the integrity and cohesiveness of the process by which responsibility for anticipatory breach of a promise is handled. Step 4: Ascertaining the breach or fulfillment of a promise

I does not fulfill the promise made to Thou, in the sense that the event that I had undertaken to cause was not observed by Thou or They, nor would it have been observed by Them or Those had they been able to make their own independent observations. Note that, at this point, the promise as made by I has been breached, but the breach has not yet been ascertained. The quarterly report was not delivered by I as promised, but no one has noted this yet. In organizations, most breached promises are passed over in the silence that befits ‘politeness norms’, which hide, nevertheless, a deep-seated lack of respect for the identity and commitment of the promissory. Alternatively, the promise has been fulfilled: the report was produced, on time, at the right level of detail and with the right level of diligence. Again, there is likely no acknowledgement at this step of the analysis, despite the fact that acknowledgment is as important to kept promises as it is to broken ones: acknowledgment signals a release of I from his commitment to Thou via a successful discharge of I’s obligation to keep his promise. Step 5: Ascertaining and accepting that the promise has been breached

I awakens, and, once awake, knows that the event that I had undertaken to cause was not observed by Thou or They, nor would it have been observed by Them or Those, and does not disagree. Thou knows that I knows this (or ascertains it by bringing it to I’s attention) and infers from I’s lack of disagreement with the ver44 / Rotman Magazine Fall 2009

dict of non-performance the fact that I agrees with it. I knows this as well, and knows that Thou knows that I knows it. Under these conditions, I genuinely feels and believes that his promise to Thou has been breached, and that he needs to account for this breach. I knows that Thou knows this, and that Thou knows that I knows this. Step 6: Giving accounts for breaking the promise

Giving an account for a breached promise entails one or more of the following: a. producing an exculpation in the form of an explanation of the causes of the breach of the promise (“it was physically impossible to carry out the promise on account of X, which was something that I could not have foreseen at the time of the promise”); b. producing an exculpation in the form of a justification of the reasons of the breach of the promise (“it was morally impossible or undesirable to carry out the promise on account of Y, which was something that I could not have foreseen at the time of the promise”); c. producing an inculpation for the breached promise, wherein I takes responsibility for some failure of knowing, feeling or doing that led him to breach the promise.

They, Them and Those play crucial roles in both exculpations (explanations, justifications) and inculpations, which together I will call accounts. They, Them and Those function as (real or hypothetical) arbiters of: what a legitimate cause of a breach is (what it is that I can claim to ‘not have been able to do’); what a legitimate reason is (what it is that I can claim to ‘not have been able to feel or want’); and what it is that I can claim to ‘not have been able to anticipate’ at the time of the promise. In producing accounts for the breach of his promise, I produces the right language with the right feeling at the right time toward the right person (Thou), which causes Thou to accept I’s recognition of the failure and the excuse provided as authentic. Step 7: Accepting or rejecting the accounts given

Whether or not Thou believes that the account is genuine (that I is not self-deceived about it) and valid (that it would be accepted by a They, Them and Those that operate above a minimum standard of integrity and competence) is something that Thou decides on the basis of not only I’s behaviour and evinced emotions, but also on the basis of Thou’s all-things-considered evaluation of I. In the ideal accountability scenario, Thou informs I about whether or not Thou has accepted I’s account for his breached promise, and, once again, the same standards apply: Thou produces the right language, with the right feeling, at the right time, toward the right

The realm of anticipatory breach is often where executives and the cultures they create make or break their accountability fabric.

person (I in this case), which causes I to accept Thou’s acceptance of I’s excuse as authentic. Whether or not I believes that Thou’s acceptance of the account is authentic (it represents what Thou truthfully believes), genuine (I believes that Thou is not self-deceived about his belief, even though Thou believes it truly) and valid (I believes that it would be accepted by a They, Them and Those that operate at a minimum standard of integrity and competence) is something that I decides on the basis of not only Thou’s behaviour and evinced emotions, but also on the basis of I’s all-things-considered evaluation of Thou. Step 8: Re-committing

At this point, I may renew his promise to Thou, who has to decide whether or not to accept the renewed promise. Acceptance or rejection by Thou will depend on the following: • Thou’s acceptance or rejection of the authenticity of the excuses provided by I for the earlier breach of his promise; • Thou’s evaluation of the genuineness and validity of the excuses provided by I for the earlier breach of promise; • Thou’s evaluation of the authenticity and genuineness of I in making the new promise; and • Thou’s evaluation of the competence of I in making the new promise. Thou’s evaluation of I’s authenticity will be based on Thou’s evaluation of the level of congruence among I’s feelings, sensations, thoughts and deeds (including words) in producing excuses and making the new promise. His evaluation of I’s genuineness, integrity and competence will be based on judgments made by Thou and They and hypothetical judgments that Thou believes Them and Those would make about I given the observations that Thou has registered. The Lesson: Promising is Difficult

The difficulty of the commitment path sketched out herein makes one thing clear: promising is difficult. Committing ourselves to courses of action by uttering words and phrases is among the most complex things that humans can do. No animal or computational device can substitute for the human agent in the act of making a promise and following through on the path of commitment that it generates. There is no advance in artificial intelligence (and there have been many) that will have you ready to

accept a computer’s analysis in lieu of that of your oncologist; and, no amount or intensity of barking or meowing will persuade you to accept a commitment from your pet. The lessons of this model are many. Our interactions live in multiple, parallel planes (BAVD), and it is the congruence of our actions on these planes that makes our promises authentic and genuine. They, Them and Those are crucial elements of the very act of promising, just like the chorus that ‘sees the truth’ is a key component of every Greek tragedy. Keeping promises is not the only way to build accountability within an organization: breaking promises ‘in the right way’ – for the right reasons, with the right feeling – can be equally constructive and helpful to the inner life of responsibility and agency within an organization. In closing

Keeping promises and accounting for their breaches in credible, genuine and authentic ways is what makes organizations work, societies thrive, and cultures promulgate themselves into the future. The commitment path described herein can thus be seen as an ‘audit trail’ for the journey of promising, a way of assigning responsibility in the face of ambiguity and subterfuge. It is also much more, as it can serve as a powerful regulative tool for any speech act. Simply put, saying anything whatsoever is a promise: it is a promise that what you have said is truthful and truth-like; it is a joint commitment to sincerity and accuracy. If you want proof of this, just place ‘I assert’ before a proposition, like ‘Today is Tuesday’. You will get ‘I assert that today is Tuesday’, which entails that I say it because I believe it, and I believe it because it is true. So, where does accountability start? It begins with you, as soon as you open your mouth for the purpose of voicing a word.

Mihnea Moldoveanu is the Marcel Desautels Professor of

Integrative Thinking and Director of the Desautels Centre for Integrative Thinking at the Rotman School of Management. He is also the founder, past CEO and Chief Technical Officer of Redline Communications, Inc., the fastest growing company in central Canada during 2002-2007. He was voted one of Canada’s ‘Top 40 under 40’ for 2007. Acknowledgment: The author is deeply grateful to his friends in the Organizational Mindsets Practice at McKinsey & Co: Zafer Achi, Edy Greenblatt, Christophe Mikolajkzak and Scott Rutherford for several stimulating discussions and workshops on this topic.

Rotman Magazine Fall 2009 / 45

LEVERAGING DIVERSITY THROUGH PSYCHOLOGICAL SAFETY Diversity is a key element of the modern landscape, but left unchecked, it can impair both performance and learning. The antidote: psychological safety. by Amy Edmondson and Kathryn Roloff

A NURSE WORKING THE NIGHT SHIFT in a busy urban hospital makes her evening rounds – reviewing patients’ treatment plans, taking temperatures and administering medications. She notices that the dosage for one of the patient’s meds seems a bit high. Fleetingly, she considers calling the doctor at home to check the order. Just as fleetingly, she recalls the doctor’s disparaging comments about her abilities the last time she called. All but certain that the dose is in fact fine (the patient has an unusual condition and is on an experimental protocol, justifying the high dose), she pulls the drug from the supply cabinet and heads for the patient’s bed. In the nurse’s hesitation and almost imperceptible decision not to call the physician, she has implicitly considered – and effectively discounted – the possibility that a patient may be harmed. The discount is not caused by a lack of caring about human life; quite

the contrary, this person has devoted her career to caring for and helping to heal the sick. Instead, in that subtle moment of opportunity to voice rather than suppress a concern, her brain has exaggerated the importance of the doctor’s scorn and minimized to near zero the chance of future harm to the patient. Far from the urban hospital, a young pilot in a military training flight notices that the senior pilot, a captain, may have made a crucial misjudgment, but lets the moment go by without pointing out the error. The young pilot is not only of lower rank and status but is also formally evaluated on every flight. The prospect of speaking up to the superior officer brings significant emotional costs, even though the pilots are thought of as interdependent members of a cockpit team. Unlike the nurse, the pilot chooses silence possibly over preservation of his own life. Here again, he inadvertently disRotman Magazine Fall 2009 / 47

counts the chances that not speaking up will lead to a fatal crash and lets the anticipated discomfort of being chastised or ignored distort his judgment. A senior executive, recently hired by a successful consumer products company, has grave reservations about a planned takeover. New to the top management team and conscious of his status as an outsider, he remains silent because other executives seem uniformly enthusiastic. Many months later, when it is clear that the takeover has failed badly, the team gathers to review what happened. Aided by a consultant, each executive muses on what he or she might have done to contribute to the failure. The silent executive, now less of an outsider, reveals his prior concerns, openly apologetic about his silence, explaining – with palpable emotion – that the others’ enthusiasm left him afraid to be ‘the skunk at the picnic’. What these vignettes capture are moments of failed collaboration. Unfortunately, such moments happen countless times throughout the day in virtually every workplace, usually without much conscious attention. When uncertainty clouds our tentative thoughts and views – views that may be at odds with those of others’ – we often take the path of ‘reduced interpersonal resistance’; it feels natural to do so in all but the most familiar settings. This can happen when a lot is at stake (a patient’s health, an aircraft’s safety, a costly takeover) and when not much is at stake (a small improvement idea is not communicated to the individual who could act on it.) Either way, the silence, along with the incomplete thoughts that lie behind it, inhibits team learning in organizations that depend upon such learning for their ongoing viability. Effective communication across boundaries – whether they be disciplinary, status-based, geographic or demographic — is particularly challenging under conditions of uncertainty. In this article we propose that ‘psychological safety’ can mitigate the challenges posed by such boundaries.

high or low) tend to be very similar among people who work closely together, such as members of a team. This happens both because team members are subject to the same set of contextual influences and because these perceptions develop out of salient shared experiences. A team with high psychological safety is not one characterized by an unrelentingly positive affect or a careless sense of permissiveness, but rather one in which members are confident that their team will not embarrass, reject or punish someone for speaking up. Team psychological safety thus describes an interpersonal climate characterized by trust and respect, in which people are comfortable being themselves. Leaders are instrumental in creating such a climate by explicitly inviting input and feedback, being inclusive and fostering trust and respect, while modeling openness and fallibility themselves. Consequences of a psychologically-safe environment may include help and feedback seeking, speaking up about errors and concerns, innovation and boundary spanning behaviour. In organizations with salient power hierarchies such as hospitals, the interpersonal risks of speaking up can be particularly acute. Team leaders are often high-status senior physicians whose role and stature can be intimidating to members of other professions, such as nursing, social work, or physical therapy. In a study of cardiac surgery teams, I showed that physicians play a critical role in mitigating self-censorship by inviting team members to speak, minimizing the effect of status differences by explicitly stating that all team members’ input is essential to providing high-quality care. Another study with Yale Professor Ingrid Nembhard looked at psychological safety and professional status in hospitals and its effect on improvement efforts. Notably, although psychological safety increased, on average, with professional status, in some work groups, inclusive leadership mitigated the status differences, and these groups were found to have greater engagement in quality improvement and more extensive team learning.

Psychological Safety

Psychological safety, or the belief that one will not be rejected or humiliated in a particular setting or role, describes a climate in which people feel free to express work-relevant thoughts and feelings. In psychologically-safe environments, people believe that if they make a well-intentioned mistake, others will not think less of them for it, nor will they resent or penalize them for asking for help, information or feedback. Psychological safety thus fosters the confidence to take interpersonal risks, allowing oneself and one’s colleagues to learn and focus on collective goals and problem prevention rather than on self-protection. While this may sound simple, expressing work-relevant thoughts and feelings can be unexpectedly challenging when those thoughts stand a chance to oppose the views of others, and when uncertainty makes it hard to know for sure whether one is right or how one might be received. Yet this is exactly what is required of teams and their members if they are to realize the promise of collaboration across boundaries. My own [Prof. Edmondson’s] research in a variety of organizations has shown that perceptions of psychological safety (whether 48 / Rotman Magazine Fall 2009

Three Types of Diversity

Organizations of all types rely heavily on the collaboration and learning of diverse teams. To date, researchers have often treated diversity as a single idea, diluting the interpretability of different findings. Penn State Professor David Harrison and Wharton’s Katherine Klein propose organizing diversity into three categories: separation, variety and disparity. We will examine each in turn. 1. Separation Diversity

This type of diversity occurs when differences in a particular attribute within a group take different values along a horizontal continuum. For example, differences in opinion with respect to a particular issue represent a form of separation diversity, as do differences in time zone or physical location. Research shows that psychologically, individuals have a strong preference for others in a perceived ‘in-group’ and a bias against those in perceived ‘outgroups’. As a result, when salient horizontal differences exist between members of a team, individuals categorize members as

Individuals have a strong preference for others in the perceived ‘in-group’ and a bias against those in perceived ‘out-groups’.

in-group or out-group, depending upon similarity to, or distance from them. Working in teams, people tend to prefer homogeneity over heterogeneity due to a preference for being with others who are perceived to be similar in values, attitudes and beliefs. On average, homogeneous teams experience greater trust and communication among members. Despite deeply-entrenched cognitive biases towards similarity, it is well established that group conformity often leads to groupthink and interferes with the creative process. The quality of the communication in non-diverse groups is likely to be narrow in scope and less useful for accomplishing team goals. Researchers have noted that the ‘positive conflict’ that arises from disagreement stimulates learning and collaboration in teams. However, achieving this is difficult because differences in values, attitudes or belief are deeply personal. However, with leadership and attention, groups with separation diversity can work together to build trust and psychological safety, enabling appreciation of others’ differences. Literal separation, in terms of physical location, is an increasingly common form of separation diversity, as a growing number of teams work across different locations. In many global companies, work teams in geographically-dispersed locations are used to integrate expertise. Harvard researcher Debora Sole and I showed that team members at specific locations can develop situated knowledge, or site-specific work practices and understanding, that team members in other locations lack. Such knowledge functions as a form of tacit team knowledge and can be a source of useful input for geographically-dispersed work teams. Yet without psychological safety and active sharing of this knowledge, it is ignored or underutilized, much the same way that tacit individual knowledge is underutilized.

disciplinary integration is on the rise, especially for innovation projects. Under the right conditions, expertise differences can stimulate learning behaviours, as cross-functional teams can serve as a mechanism for combining different sets of highly-specialized skills into one cohesive group. The obvious benefit of this form of collaboration is the qualified, high-level information that can be brought to the table by each team member. On the other hand, specialized team members can become entrenched in the values and knowledge of their discipline, resulting in reduced flexibility and increased conflict. When teamwork is hampered by goals narrowly associated with discipline identity, consensus becomes difficult. However, the conflict that arises in groups with expertise differences can improve team learning because it is caused in part by the sharing of multiple perspectives and scenarios while preventing the threats of groupthink. Demographic differences serve as another major source of variety diversity in work teams, stemming from the increases in travel and immigration. Organizations recognize this trend and often create diverse teams to access unique cultural perspectives. Yet, merely having members of various cultures on a team is not enough to realize the associated benefits. In one study, researchers found that when significant cultural differences are apparent in groups, individuals will often identify more strongly with their cultural subgroup rather than with the larger group. This is because being in the cultural minority is often an obvious part of the individual’s identity, and these individuals perceive their evaluation as team members as tied to their cultural identity. Here too, it takes effort to build an interpersonal climate in which these differences can be enriching to the team’s process and output. 3. Disparity Diversity

2. Variety Diversity

With this type of diversity, group differences are categorical. For example, differences in education may categorize individual members into groups as ‘psychologists’, ‘lawyers’ or ‘engineers’. Other categorical differences include gender or ethnicity. One of the major sources of variety diversity in organizational teams stems from differences in expertise. Teams with high levels of expertise differences are often called ‘cross-functional teams’. Such multi-

Disparity diversity is manifested as group differences falling along a vertical continuum, ranked according to the social value of a particular attribute. For example, differences in professional status among team members. This type of diversity may be the most challenging for ensuring collaboration: when differences between members fall on a vertical scale where those at the top have the most power and those at the bottom have the least, lower-power individuals may find it hard to speak up, as illustrated in our opening vignettes. Rotman Magazine Fall 2009 / 49

Examples of Team Diversity

Figure One

Demographic

Expertise

Location

Status

Type of Diversity:

Variety and/or disparity

Variety

Separation

Disparity

Composition of Team:

Multiple identity groups based on demographic origins

Multiple sets of skills and expertise based on education and work experience

Geographically dispersed team members

More than one status level

Team Challenges:

Tacit knowledge based on culture, gender, race, age or other salient identity

Team members who identify with expertiserelated subgroups over team identity

Creating a team goal adapted to multiple local needs

Social norms of deference to authority

Collaboration Enabled By:

• Sharing individual perspectives • Creating an orientation towards valuing cultural differences

• Sharing expertisebased knowledge as possible • Fostering a collective group identity

• Periodic visits to other sites • Attention to unique local knowledge and focus on shared goal

Leadership inclusiveness to minimize experienced status gaps

Although demographic differences are categorical, they sometimes also fall along a power hierarchy due to the nature of social power hierarchies in society; for example, power differences in organizations have been documented for gender and race. Individuals cognizant of the threat of negative stereotypes associated with cultural identity may become hindered by self-fulfilling prophecies or a perceived need to ‘overcome’ negative stereotypes before being valued on equal turf with the other members of the team. Similarly, unconscious negative stereotypes significantly hinder the team’s performance by virtue of team members ‘dancing around the issue,’ which allows negative stereotypes to arise in other, more subtle ways. Teams and organizations that work to actively acknowledge and utilize unique cultural knowledge ipso facto support many of the factors associated with increased psychological safety, notably respect for different points of view and norms of openness in communication. Thus, in culturally-diverse teams, members’ perspectives on cultural diversity can serve to increase or decrease team psychological safety and learning. When teams are initially formed, cultural diversity can promote team learning by including a wide range of perspectives, which increases the amount of team knowledge. However, over time, if the power hierarchies associated with ethnic differences persist, these differences can limit the effectiveness of communication and hence collaboration. Without active attempts to reduce power differences, over time ethnic diversity is likely to limit the effectiveness of communication by silencing less powerful team members and reducing collaboration. This is in part because members of different identity groups – whether based on age, race, 50 / Rotman Magazine Fall 2009

gender or cultural background – come to the team with different taken-for-granted assumptions that, when left unexplored and unchallenged, can give rise to misunderstandings. Teams can also encompass differences in professional status, another form of disparity diversity. Professional status has been found to significantly impact team beliefs about psychological safety. Team members are well aware of the benefits that come with professional status. Yet, even team members with identical professional identities can have status differences (consider intern-level and senior attending physicians working together to care for patients, or the pilots with whom we opened this chapter). When teams include one or more members of different status, the stakes for taking interpersonal risks increase for the lower-status members. Lower-status team members are often fearful of the negative consequences associated with perceived incompetence such as lowered chances of promotion or salary increase. Such fears can prohibit a candid flow of discourse, which is replaced instead by politeness and indirectness, abstract conversation and feigned reflective discussion. When Diversity Types Co-Occur

The three types of diversity described above are not mutually exclusive. In fact, teams are likely to contain combinations of them. For example, an emergency room team comprised of nurses, residents and physicians faces issues of status, expertise, and oftendemographic differences as well. Teams with more than one kind of diversity will face even more serious barriers to collaboration, particularly if the areas of diversity overlap, creating deeper fissures or ‘faultlines’. These occur when two or more identity groups

in a team show a high degree of overlap (e.g., ‘gender and function’, or ‘status and expertise’), increasing the chances of conflict. While the various types of diversity described here create potential barriers to collaboration, each can be overcome through careful attention to group process. For demographic differences, it is helpful to ensure that the unique perspectives that come with age, gender, race or cultural background are discussable. Discussion can help people value these differences and see them as resources for the group’s task. Similarly, expertise diversity can be mitigated by skillful sharing of relevant knowledge, and by a strong collective group identity. For example, field research on dispersed teams shows that visiting each others’ work sites is a powerful way to build trust and understanding and facilitate collaboration, long after the visits are over. If teams facing more than one collaboration barrier experience significantly greater obstacles to collaboration than teams without such barriers then, as argued above, working to establish a climate of psychological safety may be progressively more important for teams with multiple types of diversity.

munication with colleagues can be thwarted in mundane ways, despite shared aims and considerable motivation to achieve them. Creating psychologically-safe environments is one way to overcome such incidences and unlock the enormous potential of team collaboration. Clearly, effective collaboration is a necessary component of team learning, and team learning is a critical component of performance. Despite the barriers to collaboration discussed here, team diversity can stimulate learning if the organizational context supports open communication. Psychological safety is a critical component of a context that moderates a team’s ability to overcome barriers to collaboration. In the end, psychological safety can enable team diversity to be better accessed and leveraged, reaping the benefits associated with diverse sets of skills, experience, knowledge and backgrounds in ways that would not be possible if team members were unwilling to speak up and listen carefully to each other.

In closing

Amy Edmondson is the Novartis Professor of Leadership and Management and co-unit head, Technology and Operations Management at Harvard Business School. Kathryn Roloff is a doctoral student in Organizational Psychology at Columbia University’s Teachers College.

The vignettes we opened with remind us that human beings often fail to act in their own or in their organization’s best interest when small interpersonal risks loom large in the moment, and that com-

The preceeding is excerpted from a chapter published in Team Effectiveness in Complex Organizations: Cross-disciplinary Perspectives and Approaches (Routledge Academic, 2008).

Rotman Magazine Fall 2009 / 51

LEADERSHIP FOR Each year in March, 800 delegates from 60 countries convene for the Skoll World Forum, a gathering of the world’s leading social entrepreneurs organized by the Skoll Foundation. Prominent figures from the social, academic, finance, corporate and policy sectors engage for three days of debates and discussions focused on scaling solutions to some of the world’s most pressing issues. Following is an excerpt from one of the panels, “Leadership for Change,” which featured five prominent business leaders/social entrepreneurs.

Compiled by Karen Christensen

Alan Hassenfeld

Sample Initiatives:

Chairman, Executive Committee, Hasbro Inc.

One of our initiatives is called Operation Smile, where we partner with other organizations to do cleft-palate surgery on children from developing countries. Every year, we bring all of our employees together for a progress update on this project, which includes a video presentation. I can tell you, there’s not a dry eye in the house when our people watch that video. We give each employee a copy to take home and share with their family and friends, because we want people to understand our corporate culture. On other fronts, I run something called the International Council of Toy Industries Care Process. We’re trying to create a single global code of conduct for factory conditions where children’s products are made. It’s a little bit easier for us to do this than for other industries, because 80 per cent of children’s products are made in China. To date, we have 1.5 million workers protected under the code. We included retailers, big brands and manufacturers in the planning process, because without any one of them it wouldn’t have worked. Leadership Lessons:

Our Approach to CSR:

For Hasbro, the relation between business and society is seamless. All of our success is due to children and families, so we recognize that we have an obligation and a debt to repay. One of our most important stakeholders is the communities that we live and breathe in. The more we do for them in terms of education and health, the more we will attract and keep good people. If you build a children’s hospital in the community you live in, you’ve filled a void and you’re helping to create the future. If you can’t explain the importance of that to a shareholder, you shouldn’t be running a company. I think of it as ‘cultivating the field’ – cultivating a garden for the future. Whether it’s doing things for children or helping women in the developing world, what we’re trying to do is move the bar. None of us is ever going to reach the very top, but if we continue to move it along, we’ll get somewhere. Sadly, no matter what any corporation does, it will never make the front page of the newspaper; and if you do talk about what you have done, people try to find the chinks in your armour. Don’t get me wrong, I love what we do, and I’m going to continue to do it, because I know we will make a difference. I just find it frustrating that there is so little coverage of some of the great social entrepreneurship that is going on.

Many people aspire to be leaders because they want the authority, but how many of them take seriously the responsibility that comes with it? Very few. One of my rules is that you should never ask your people to do something that you yourself would not do. If you would not go to Afghanistan, don’t ask anyone else to go there. Number two, never try to please everyone, because by doing so, you please no one. But for God’s sake, make a decision, because often making no decision is even worse than making a bad decision. Looking Ahead:

I think our business schools have done a pretty lousy job. Sure, they talk about business ethics, but come on, let’s talk about humanity! We’re still getting MBAs coming out of school that don’t share the approach to caring that a lot of us think we have. Another big concern of mine is technology. With cell phones, PDAs, computers and videogame, kids are overloaded with it right now, and I fear that we are losing something very important, which is human contact. One thing I learned early on in my career is to watch people’s body movements, to look into their eyes, and when you shake their hand, if it’s sweaty, what’s wrong? We can’t forget about the importance of social skills. Rotman Magazine Fall 2009 / 53

Tae Yoo Our Approach to CSR:

When I started out at Cisco, my job was to focus on opportunities that the Internet provided from a commercial perspective, but it quickly dawned on me that the Web creates so many other opportunities. I realized that if we wanted to grow beyond a start-up, we would have to create a culture that looks at both commercial and social-impact possibilities. Corporate social responsibility isn’t just about writing cheques; it entails balancing the commercial with the social, which often involves looking beyond the private sector at public-private partnerships and multi-stakeholder organizations. The current economy is very upsetting to a lot of people, but this is a great opportunity to really question how we do things and look for new partnerships. When considering social initiatives, I would advise corporations to look at their core competencies. For Cisco, education is clearly a key piece of that, so we’ve invested in this area. We want to be around for a very long time. If we can get the economic performance right, with good governance and transparency in place, if we steward the environment well, manage social opportunities in terms of taking care of our communities, and successfully handle our relationships with our employees and our supply chain, we will achieve long-term sustainability. Sample Initiatives:

Senior Vice President, Corporate Affairs, Cisco

Our Jordan Education Initiative is an example of our approach to collaborating with local entities. We wanted to partner with other

Fadi Ghandour Our Approach to CSR:

Founder and CEO, Aramex International 54 / Rotman Magazine Fall 2009

It has become clear that ‘the business of business’ cannot be only business, and that the definition of success cannot simply be profit maximization. Shareholders are not the only important people in my organization: our employees are as important as our shareholders, the community we live in is as important as our shareholders, and the environment that we pollute is as important as our shareholders. We need to redefine the way we think about the societies we live in – how we invest in them and how we affect them, positively or negatively. Eventually, we need to bring these externalities onto our balance sheets by monetizing them somehow, so that people can understand that there is a high cost when you neglect the society you operate in. Marginalization in a society leads to radicalism. Is there a business cost for radicalization? Is there a cost for civil conflict? Of course there is, so why don’t we bring these things onto a company’s financials? Profit entails both social returns and financial returns. When I invest in a marginalized community and provide hope to the youth on the ground, am I not contributing to prosperity? If a shareholder doesn’t like the way we manage our money, he can invest somewhere

corporations and the public sector. For this project, that meant the Government of Jordan and the World Economic Forum, amongst others. We visited Jordan to find a local company that we could work with to create an environment for others to thrive in. We found a small company called Rubicon, owned by a woman named Randa Ayoubi, who had set out to create a media company. We spoke with her about partnering on some projects, but she needed to get some new high-tech talent in her organization before we could proceed. She put an ad in the paper that said, “opportunity available: worst-case scenario, you get new skills; best case, you get a job.” The response was overwhelming. She ran a course at a cybercafé and all these people came in to learn 3D media skills. She picked out the best of the crop to join her company, growing from 40 to more than 270 employees. She has since inked a deal with MGM, amongst others. To me, this is one of the most important contributions that we as a company have ever made. Another example is from 2001, when the tech bubble burst and we had to let go of some terrific employees. To help these people out we created the Community Fellows Program, which allowed them to remain employees of Cisco, but take a pay cut (receiving one third of their salary but full benefits and continued stock options) and go into community organizations that aligned with their skill sets and interests. Our hope was that the market would turn around and we would eventually take them back. We had never done this before and didn’t really know what we were doing – but that’s part of innovation. In the end, 40 per cent of the employees

came back, 40 per cent stayed within the NGOs and 20 per cent went on to other organizations; but they all said that this had been one of the most important experiences of their lives. Leadership Lessons:

One of my core philosophies as a leader is that I am okay with being wrong, as long as we as a group get it right. If I had all the answers, I wouldn’t need a team. One person can’t have all the answers no matter how smart or worldly they are. I’m comfortable working with people that are very different from me. The scariest thing for me would be to have a team that is exactly like me, because I know that we would never capture any opportunities. Looking Ahead:

We live in a collaborative world that’s influenced by geography, culture, religion and socioeconomic status, which means that students need to come out of school feeling very comfortable collaborating across borders and sectors. One thing Cisco is looking at is the global teaching community: how can we help them use technology to facilitate and accelerate their teaching, rather than complicate it? I actually love the current generation of students that is coming out of business schools. They are the most socially conscious and caring I’ve ever seen, and they aren’t afraid to ask tough questions.

else. We have found that spending on social initiatives actually attracts shareholders, because they are also members of the community. In addition, we attract talent to our organization because we manage things differently from the typical company. Talented people want to feel that they are contributing to society, so giving them opportunities to invest in their communities has a massive return in terms of productivity. This is the new paradigm.

direct experience in our industry. Instead, we bring in young graduates and train the heck out of them and create logisticians out of them. We are an extremely entrepreneurial company, and we teach our people how to be entrepreneurial; as a result, lots of new companies exist today because their leaders were trained at Aramex. This used to upset me, but now I celebrate it, and we even use it as a recruiting tool.

Sample Initiative:

Looking Ahead:

During the Gaza war, our people were so upset by what was going on that they needed a way to feel that they were contributing to alleviating the situation. We were the first to arrive in one particular country; we responded even before some government agencies did, and asked people to bring aid. We created volunteer centres for people to give in-kind donations and we shipped them free of charge. You cannot imagine the reaction we had: it was worth hundreds of millions of dollars of advertising and loyalty from our clients.

For my company, as we have taken an activist role on social issues, the biggest resistance has come from government. There is a huge amount of distrust and a sense of exclusivity for them. Frankly, they need us, because entrepreneurs are innovators – our brains function around finding solutions. An entrepreneur, by definition, is a builder. We have to start thinking about leadership in these terms – that we are builders and solution providers, and that we should be taking that into society at the end of the day.

Leadership Lessons:

We took a decision very early on not to recruit people that have Rotman Magazine Fall 2009 / 55

Michael J. Critelli Our Approach to CSR:

Former Executive Chairman, Pitney Bowes Inc.

Long before I became CEO of Pitney Bowes, I was asked to head up Human Resources. That’s when my 19-year journey in health care began. My boss at the time did something like what [Dean] Roger Martin talked about the other night: he posed a problem to me in such a way that the ‘either/or’ alternative was not an option. He said, “we’ve always been a very generous company and paid for our peoples’ health care expenses, but that can’t continue: our costs have gone up 14 per cent each year for the last five years. Employees have to start contributing; but at the same time, I want you to improve their satisfaction with our health plan and improve employee and retiree health.” The first lesson I would give people is to reinforce what Roger said: that great solutions often arise from resolving apparent either/or alternatives. My second lesson is this: if you’re going to take on social initiatives, you really have to incorporate ‘soft’ benefits, and not be afraid to do so. With our approach to employee health, we were eventually proven right, but it wasn’t obvious up front because hard data didn’t exist. In most cases, you have to take some chances, and that gets to my third point. There was a lot of trial and error in our plan design. We finally settled on a formula called ‘value-based insurance’, whereby we started to reward good provider and patient behaviour. In other words, we turned traditional health insurance

William Swope Our Approach to CSR:

General Manager, Corporate Sustainability Group, Intel Corporation 56 / Rotman Magazine Fall 2009

Intel is well known for making things smaller, cheaper and faster. But the Intel that you may not know is the one that puts $100 million a year into education efforts around the world, most of it in developing countries. What we’ve found is that systematic approaches to these projects trump short-term gloryseeking approaches. The systemic approach asks, “what is everything – every piece of the puzzle – that is required to make this project succeed?” If you’re going to change a school system, for instance, you need to have training in place, access to technology, local content and connectivity to the rest of the world, so the children aren’t isolated. These are some of the fundamentals, but I could name a lot more aspects that are ancillary but equally important, such as involvement of the community, teachers and parents. Agreement on the timeframe for such an initiative is crucial, because people become very focused on different aspects of the problem. Someone that is building a software business to develop content for a secondary school is saying, “I want profitability within X quarters or I won’t be able to maintain my cash flow”; the school is saying, “once we get the software we’ll run it in a couple of classrooms, and after a couple of years, if we’re comfortable with it, we may deploy it or we may reject it.” These two systems are diametrically opposed in terms

into more of a risk-management program, where people could alter what they paid by engaging in healthier behaviour. We recognized that the benefits of our approach would not be felt in year one – that we needed a multi-year time horizon. So my third lesson is that you have to tolerate some level of error, as long as the mistakes are made through reasonable decisions. My fourth lesson is that most good investments require a multiyear time horizon. Even in big corporations with quarterly earnings targets, there has to be some room for patient capital. Today’s firms have to start choosing investors with a more patient view and not cater to those with a ‘trader mentality’. We have to consciously try to attract shareholders who buy into what the firm is trying to accomplish over the long term. You still have to have some rewards for the short term, in the form of dividends and share repurchase, but ultimately there must be a balance. Sample Initiatives:

The first thing we did was recognize the importance of creating a healthy environment for our employees in terms of nutrition, fitness and lifestyle in the workplace – where they spend most of their waking hours. We did simple things like providing healthy foods in our cafeteria and offering proper portion-sizes. The recent book by Richard Thaler and Cass Sunstein, Nudge,

of metrics. Leadership entails figuring out how to develop ‘winwins’ in such an environment. Sample Initiatives:

Six years ago we made a complete change as a company by saying, “we are no longer going to try to build the world’s highestperformance processor; instead, we are going to focus on building the world’s most energy-efficient processor.” This changed everything about Intel. We refer to it as our ‘right-hand turn’, and it’s a good thing we did it, because three quarters of our total carbon footprint is in the energy consumed by the products we build. This was the single-biggest step we could have taken to reduce our carbon footprint in the world. I’m also on the Intel Foundation Board, and we have a tendency to make decisions that promote science, technology, engineering and math (‘STEM’) because we believe that these areas are fundamental to moving the world forward. But Intel has also invested in a water conservation initiative that has had no economic return – it was just the right thing to do. We also got together with Microsoft and Cisco to try to figure out what skills students really need for the 21st century, and we will be making these findings public over the next three years. We believe that these skills will include critical thinking, problem solving and collaboration. The ability to solve complex problems is a funda-

is very much on target: if you nudge people in a positive direction by making healthy alternatives attractive and accessible, you can change behaviour. Another thing we did was to put in onsite health clinics, and over seven years, a third-party firm found that we were saving $2.30 for every dollar we invested in it. So we learned a second lesson about employee health: delivering health care close to where people spend most of their waking hours, is the way to go. The truth is, employers and labour unions probably have more alignment with the health of their people than we can ever achieve with government, insurance companies or even doctors. Looking Ahead:

We seem to have moved in a direction where government distrusts both business and the non-profit sector, insisting on endless lists of detailed rules and red tape. Government has to start trusting the other players in society. This is the single-biggest paradigm change we need, so we can get away from all the checks and balances that stifle innovation in all sectors. In the end, framing goals collaboratively and broadly, defining the businesscase parameters correctly, tolerating mistakes and rewarding entrepreneurship will create an environment that nudges people toward doing the right things.

mental skill that we believe can be taught and tested. Last but not least, last year Intel employees gave over one million hours of their own time to volunteer in organizations around the world. I think most companies can spare a few hours – even just one hour per month, per employee – for volunteering in their community. This is a fantastic way to approach CSR. Leadership Lessons:

You have to allow for lots of informed mistakes. In my opinion, these actually encourage innovation. In many cultures there is no room for failure, but for an innovator, failure is part and parcel of the process that leads to success. Looking Ahead:

In the end, every individual in every organization can make a difference in the way they run their personal life and in the way they conduct themselves in their relationships with others. The preceeding is excerpted from the Skoll World Forum on Social Entrepreneurship, presented by the Skoll Foundation at Oxford’s Said Business School in March 2009. The Skoll Foundation was created by Jeffrey Skoll (Hon LLB ’03, BASc ’87) to pursue his vision of a world where all people, regardless of geography, background or economic status, enjoy and employ the full range of their talents and abilities. Dean Roger Martin is a member of the Foundation’s board of directors, and spoke at the 2009 Forum. To watch the video of this and other sessions, visit skollfoundation.org/skollworldforum/index.asp Rotman Magazine Fall 2009 / 57

Corporate New Governance Challenges For Just as a re-balancing of the director’s role was taking shape post-Sarbanes-Oxley, expected reforms in the areas of risk management and compensation will once again challenge director effectiveness. By David Beatty

IN CASE ANYONE HASN’T NOTICED, we are in the midst of a tectonicplate movement in the financial world that is shaking the ‘real’ world quite dramatically. The purpose of this article is not to review the causes or longevity of the current situation, but to explore the

58 / Rotman Magazine Fall 2009

curiosity that in the world of publicly-traded companies, boards of directors have let society down. And it isn’t the first time. If we go back to the bursting of the South Sea bubble in London in 1720, we can record the first time shareholders bellowed this

refrain: “Where were the directors?” Following the collapse of the Great South Seas Corporation (and many other companies also publicly traded at that time) Alexander Pope wrote a sonnet that began: At length corruption, like a general flood, Did deluge all, and avarice creeping on, Spread, like a low born mist and hid the sun.” Pope ends with the sad conclusion that “Britain was sunk in lucre’s sordid charms.” The British Parliament acted swiftly, putting many directors in jail, taking over their estates and banning joint-stock companies for 100 years. In The Way We Live Now, 19th century novelist Anthony Trollope wrote about the board of the magnificently-named Great South Central Pacific and Western Railway Company as follows: The Chairman, Augustus John Melmotte himself would speak a few slow words…always indicative of triumph, and then everybody would agree to everything, somebody would sign something, and the board would be over. More recently, John Galsworthy wrote of Soames Forsyth in his 1906 novel The Man of Property wondering, “What besides the drawing of fees and the drinking of tea are the duties of a director?”; and in 1940, Irving Olds, the Chair and CEO of US Steel, declared that directors were “the parsley on the fish – decorative but not useful.” Perhaps they were right; but it doesn’t have to be that way. A Three-Tiered Role

The widely-held theory is that boards of directors are tasked with looking after shareholder interests by watching over management and keeping everyone focused on the long-term creation of shareholder value. However, if we look closer, directors carry out these duties in terms of three distinct time horizons: 60 / Rotman Magazine Fall 2009

The past: directors examine the accounts with the shareholders’ auditors and, if all is well, ultimately declare these accounts to be a fair, true and accurate representation of the company’s financial position. The accounts are then sent to the shareholders and posted on the Internet for all to see. The present: directors maintain an oversight of the company by determining whether or not it is meeting targets and milestones as time progresses. As a result, boards typically spend a lot of time reviewing operations with management and discussing issues related to profitability, competition and competencies. The future: directors participate in the setting and amending of the strategic direction of their company’s core businesses and possible extensions beyond the core. They not only help determine the answer to the question, “Where are we going?” but, “Who is going to get us there?” – the talent-management agenda.

With respect to directorial duties that refer to the past, SarbanesOxley (SOX) changed the playing field dramatically. Almost immediately following the disclosures surrounding Enron, WorldCom and Adelphia, the U.S. Congress acted to ensure the separation of the auditor from the management of a company and clearly established that the auditor worked for and was paid by the board’s Audit Committee and reported independently to shareholders through that committee. To ensure that there was a further check on the auditor/company relationship, the auditors’ historic right to regulate their own profession was stripped away, and a Public Company Accounting Oversight Board (known colloquially as ‘Peekaboo’) was put in place. Amongst its many duties, PCAOB must certify any audit company working for publicly-traded corporations. Without such certification, the audit company is not eligible to perform work in a publicly-traded firm.

Today’s boards not only have to navigate the troubled credit and liquidity waters of the financial crisis,

A vast array of requirements was also included in the SOX legislation, including CEO/CFO certification of the accounts, under the threat of criminal prosecution. At its very core, SOX transformed the nature of the audit profession’s relationship to the corporation that it audited, a reform that – in the American context – was sorely needed. Thus, the barn door related to the past-related aspects of the director’s task closed, and in my view, the reforms are generally very sensible. However, there were some serious side effects that have affected the ability of a board to carry out its tasks related to the present and the future. SOX had three major impacts on American boards. First, the Chair of the Audit Committee had to have solid financial credentials and members of the Audit Committee were expected to be ‘financially literate’: no more ‘earnest amateurs’ allowed. Second, the work of the board in the review of the financial accounts got much more detailed. The average American board began to spend significantly more time in the boardroom and in preparation for the boardroom. Estimates vary widely, but some observers suggest the average time spent as a director of a major American company increased from 250 to 350 hours a year. Third, because of the heavy overlay of regulatory approval, the time spent by directors was shifted to regulatory matters and away from more general oversight work and longer- term work such as helping management develop strategy and talent. Having only recently recovered from the SOX reforms, today’s boards now not only have to navigate the troubled credit and liquidity waters of the financial crisis, they are also going to be facing new governance reforms. This will be especially true in the financial services sector, whose boards were not very helpful in most global jurisdictions, from the U.S. to the UK – everywhere from Wachovia Bank to Royal Bank of Scotland to UBS. Just as SOX imposed skill requirements upon directors serving on Audit Committees, I am confident that a call will be raised for at

they are also going to be facing new governance reforms.

least one director – especially in financially-regulated institutions – to have had direct line experience with risk management. There may also be a responsibility for the Risk Management Committee to be ‘audited’ and to report out to shareholders separately from the auditor’s report. These expected reforms will result in boards spending much more time in the ‘present’ on their oversight roles, and will tend to focus them much more heavily on what is known as Enterprise Risk Management. It will be interesting to see if this renewed focus on risk mitigation will make boards more risk averse and less able to attend to the future-related aspects of their task. There is also a good chance that boards will have to specifically address their competence to set compensation. It has been noted in every financial publication and in many political speeches that greed was an important factor in the current crisis. If you compensate executives in such a way that they get huge personal gain from taking huge risks with shareholder equity, over time, you can expect disaster. Stephen Jarislowsky, an acute and often acerbic observer of public company practices, has urged directors to adopt a new compensation slogan: “Lead them not into temptation.” In both the U.S. and Canada, shareholders have demanded ‘A Say on Pay’. The result will be that at annual general meetings, boards will have to ask shareholders for their approval of the compensation packages for senior executives. The vote will not be binding, but it will certainly lead to more concern in compensation committees that shareholders are watching over the work of the board. In the UK, where ‘Say on Pay’ was legislated in 2003, knowledgeable observers report that this reform has resulted in three outcomes: first, much clearer descriptions of executive compensation regimes in publicly-traded British companies; second, a more intense dialogue between issuers and shareholders; and third, a better alignment of pay with performance. Australia also adopted an advisory vote on compensation in 2003 and The Netherlands, Sweden, Norway, Spain Rotman Magazine Fall 2009 / 61

If boards can’t really be effective at strategy – which all the sign posts are pointing to –

and France have all adopted a binding (rather than an advisory) vote on compensation at annual general meetings. How will boards improve their compensation practices? The answer is far from clear. Many, if not most, schemes for CEOs of large publicly-traded companies are Byzantine in their complexity. Modern compensation practices are designed to be incomprehensible to all but a chosen few priests of high calling. And, of course, to the CEOs themselves. Financial institutions, for example, include base pay, shortterm bonuses, mid-term bonuses, long-term incentives, perquisites and pension top-ups in their deliberations while the goals for achievement of these extras vary all over the map and the instruments to give effect to them range from cash, to Restricted Share Units, to Deferred Share Units to stock options, all designed with exquisite, Baroque detail. It’s as though Dawkin’s Law of the Conservation of Difficulty has been adopted by those involved in executive compensation. This law, applied to academic disciplines reads: “Academic obscurantism expands to fill the vacuum of simplicity.” Things will have to get simpler if shareholders are ever to come to a reasoned and reasonable point of view on executive compensation. The relationship all shareholders want is a strong, meaningful and straightforward linkage of pay to performance: lousy performance amongst your peer group should lead to lousy relative pay, while brilliant performance ought to lead to quite wonderful financial outcomes for the executives. You don’t have to be a Swiss watchmaker to be able to tell the time, and shareholders should not have to possess doctorates to figure out pay regimes. In the near term, the need for independent and unconflicted advice to the Compensation Committee will be further emphasized. As it happens, the compensation advisory industry is dominated by firms that provide many compensation services to company executives (for example, pension fund calculations.) There will likely be a much more pronounced push to ensure that 62 / Rotman Magazine Fall 2009

they certainly can and should become highly-effective at talent management.

the Board gets advice from non-conflicted advisors, and that those advisors work for and report only to the chair of the Compensation Committee. Such arrangements would mimic the relationships of the auditor to the Audit Committee after SOX. As a result of all this, it is entirely possible that the work of the board will also be deflected to significantly more time on compensation matters. Unfortunately, it is not likely that such reforms will make boards any more effective in their future-related tasks. Once again, their workloads will significantly increase and the focus will shift to risk mitigation and compensation. Will there be any time left for a board to look to the ‘future’ and help with strategy and talent management? Chances are that new pressures will only serve to reinforce old challenges, in particular the challenge of looking forward that, for boards, is longstanding and almost intractable. Spanning the Information Chasm

Across industries, it is almost impossible, and certainly rare, to build a board that is strategically effective because of the huge chasm that exists between the knowledge of managers and that of directors. A manager spends at least 3,000 hours a year at work, usually surrounded by other executives labouring just as long. It is also frequently the case that most, if not all, of the senior management team has spent a lifetime in the company or industry where they now work. Compare that to a director who might annually invest 300 hours in board meetings and preparation. That director will almost always have many other business matters on the go, so there is not a clear and complete focus on the business at hand. What an intellectual conceit it is then, for a director to ‘wander in off the street’ for a board meeting and make a contribution to corporate strategy – or even provide intelligent and informed comment on a particular decision. In a fast changing and globally competitive world, amateur tinkering on strategy and talent is simply not going to be good enough anymore.

Can management and boards come to terms with this challenge? Or should boards simply stick to their compliance and oversight roles in the present and leave strategy and major decisions entirely to management? In my view, boards do not have to, nor should they, abandon their future focus. Experience has shown that techniques and processes exist to help them make more informed and considered decisions that create value for shareholders and expose them to less risk of catastrophe. Following are some tips for spanning the information chasm between management and directors and ensuring an effective balance between the past, present and future. 1. Chair-Directors Dialogue

The chair must take the lead to ensure that a dialogue is initiated and maintained. As the meeting begins, the chair should ‘formally’ inquire about the preparedness of the directors, and as it progresses, he should note the quality of the dialogue. At the end of the meeting, during the ‘in camera’ session, the chair should explicitly seek out views on the satisfaction of the board with respect to the ability of the directors to be brought back into the picture and to feel that they could contribute to the discussion in an informed way. 2. Chair-Management Dialogue

It is vital that the chair report back to the CEO and/or the management team following the ‘in-camera’ session. The wise chair will first canvas opinion from the CEO (or the entire top management team) about their feelings on the meeting. Were the directors engaged? Did management get any new insights or points of view? Did management feel the board would have weighted things somewhat differently? What kinds of things worked with the board? Where did the board feel uncomfortable? Only when management’s points of view are ascertained should the chair give his feedback on the board’s perspective. 3. Learnings For The Next Meeting

From this dialogue, the chair and the CEO must distill opportunities to improve the spanning of the information chasm. Perhaps the PowerPoint decks needed more background; perhaps the risks needed to be more carefully explored; possibly the directors wanted more discussion. These adjustments are vital to a longer term understanding for what works for this board and what doesn’t. Only if the chair effectively manages the information chasm is there any hope that it can be effectively spanned to create the possibility of long-term value for shareholders. Switching the Future-Focus to Talent

Given the challenges outlined herein, I would argue that boards

should be more modest about their strategic capabilities and, instead, dramatically increase their interest in and attention to talent management inside the company. Surprisingly, many boards currently pay little attention to this issue. In The War for Talent, Helen Handfield-Jones, Ed Michaels and Beth Axelrod (all of McKinsey & Co.) polled 6,500 mid-to-seniorlevel executives in 35 large American companies and asked them: “In your opinion does your company know who the high and low performers are?” The staggering response: only 16 per cent said their companies knew who the high and low performers really were. Perhaps things have changed since 2001? If they haven’t, they had better, for a 2007 survey by Michaels of 6,000 managers in 77 companies found that “the most important factor in the next 20 years will be talent; smart, sophisticated business people who are technologically literate, globally astute and operationally agile.” Larry Bossidy, the celebrated former CEO of Allied Signal, seems to have caught on to this, having recently been quoted as saying, “At the end of the day, we bet on people, not strategies.” If boards can’t really be effective at strategy – which all the sign posts are pointing to – they certainly can and should become highly-effective at talent management. In closing

Just as a re-balancing of directors’ role was beginning to take effect after SOX, expected reforms in the areas of risk and compensation will once again challenge director effectiveness by taking time and attention away from focusing on the company’s future. Unfortunately, this could prove catastrophic, because the future that is in front of us is nothing like the era we have just departed. While boards will never be able to predict the future, they can become ever-more effective instruments for helping management devise plausible and actionable strategies if they do three simple things: take charge of their own agendas, manage their time against the three time horizons effectively, and continually assess their performance against best practices. The truth is, boards cannot prevent catastrophes such as the current finance crisis. Life in the 21st century is far too uncertain for that, and nasty ‘black swans’ will always be lurking around the corner. As a result, I predict that we’ll be back in about five years trying to cope with the next wave of reforms.

David Beatty, O.B.E., is the Conway Director of the Clarkson

Centre for Business Ethics & Board Effectiveness and Professor of Strategic Management at the Rotman School. He is also director of the Institute of Corporate Directors, which in partnership with the Rotman School educates Canadian board members via its Directors Education Program. He is a board member of Bank of Montreal, FirstService, Inmet Mining, Gardiner Group Capital, Ivanhoe Cambridge Shopping Centres and The Canada Steamship Line Group. Rotman Magazine Fall 2009 / 63

TOWARDS AN ACCOUNTABLE CAPITALISM By Stephen Davis, Jon Lukomnik and David Pitt-Watson

Moving towards accountable capitalism requires rethinking the governance of not just the banks or credit rating agencies, but of the overall architecture encompassing them.

WITH MANY STILL REELING from the ripple effects of the global financial crisis, it has become abundantly clear that the institutions of the financial markets and the principles and ethics of business are fundamental to economic success. Recovering from this systemic failure and ensuring that it never repeats itself will require new thinking about the types of institutions on which a successful economy depends, and more importantly, on the relationships between those institutions. Our aim here is not to lay out a detailed framework for bank solvency, accounting regulation or corporate governance. Rather, it is to clarify the principles on which any responsible market system will rest, and how these might be applied. It is also to suggest various actions that market participants can take to prevent similar disasters. In many ways, an effective economy is like an effective political system: it has checks and balances, accountabilities, responsibilities, information flows and cultures. In our view, an effective financial system depends on five central principles:

1. That the entities within it are responsible for their actions; 2. That they will be responsible if they are held accountable; 3. That those who call on them to account require relevant information; 4. That this information must be independently prepared; and 5. That market participants are vigilant in overseeing all of the above. We will briefly discuss some of the key aspects of these principles. Responsibility: Each player in the system must actively exercise

its rights to optimize the long-term value of its assets on behalf

of those for whom it works. Shareowners, for example, should not only have the right to replace board members at troubled companies, they should make use of those rights.In markets with disperse share ownership such as the U.S., Canada and UK, big investors – particularly pension funds – have pooled peoples’ savings and become the fractional owners not only of much of the debt that has turned toxic, but of the companies that originated the debt. With such a vast amount of value at stake, one might have thought they would have found ways to defend their interests and hold boards and executives accountable; but most barely tried. Mutual funds long ago morphed into machines that buy and sell securities. The average mutual fund turns over more than 100 per cent of its securities every year, which makes them traders rather than long-term investors. These traders suffer from that peculiar disease of smart people – they think they are all masters of musical chairs, believing that they can find a chair even when those about them are falling to the floor. Since they always think they can get out of the way of a disaster at the last minute (by trading), they don’t worry about trying to prevent disasters by being responsible owners or lenders. Accountability: For each player in the market, we need to be able to answer some simple questions: in whose interests do you work? To whom are you accountable? What alignments (or misalignments) of interests might affect your performance? Each player must feature governance that compels alignment with its mission and its constituency. If it isn’t so configured, it is a potential danger to the system and requires particular oversight. When you look at the capital markets, particularly in the U.S., where the credit crisis began, there are glaring gaps in accountability. For example, penRotman Magazine Fall 2009 / 65

sion plan governing boards do not include representation from the workers that are contributing to the plan; credit rating agencies are paid by issuers, not the investors who rely on the ratings; and the boards of most financial institutions do not feature independent chairs who can effectively oversee CEOs. Relevant Information: Disclosures should not be merely voluminous, but shaped for real use and addressed directly to value. A lot of heat has been generated by the debate about ‘mark to market’ accounting. The relevancy of such an accounting principle depends on the circumstances in which it is applied, but certainly it is dangerous to use this approach for bank regulation, because it is pro-cyclical: it rewards the banks when things are going well, but puts a squeeze on them when things go wrong. Equally concerning are huge areas of the financial markets that are opaque. Just look at the Credit Default Swap (CDS) marketplace. A CDS is essentially an insurance policy on whether a company will default on its loan; it’s a bit like a life insurance policy on a specific company, and just like a life insurance policy, it has a useful role. Most people would be pretty concerned if they discovered that someone they didn’t know had been buying a life insurance policy on their behalf; yet many CDS are bought and sold with no disclosure whatsoever. Similarly, so called ‘dark pools’ of liquidity exist solely to mask trading. While they may help the individual institutions buying and selling, they harm the overall system not just by robbing the rest of us of information, but by spreading liquidity too thin. Independent Information: That markets move on information is

well-known. This is why the past decade of reforms has included the forcible divorce of auditors from providing consulting services to the companies they audit, and prohibited stock analysts from being compensated for investment banking results. Markets need conflict-free intermediaries to serve as a reliable check on corporate information. Yet the reforms to date barely cover the waterfront. As noted, investors – not corporations – should pay for credit reports. But it is not only credit reporting agencies that are open to conflicts: similar potential conflicts may be seen among remuneration consultants (tempted to build CEO-friendly payouts in hopes of gaining other business); director search firms (leery of recommending feisty board candidates for fear of losing other search contracts); and various distribution channels that take fees from asset managers but claim to be doing due diligence on those same asset managers – as was the case in the Bernard Madoff situation. In The New Capitalists, we wrote that if the public lost faith in the integrity of these agents, “the capital markets would seize up,” and that is exactly what happened. Shifting from Horizontal to Vertical Regulation

Moving toward an accountable and sustainable capitalism requires rethinking the governance of not just the banks or credit rating agencies, but of the overall architecture encompassing them. Think of each market participant as a link in many chains. For example, the mortgage chain includes a homeowner who borrows to create a mortgage (link 1) from a mortgage originator such as a bank (link 2) who sells the mortgage to an investment bank for 66 / Rotman Magazine Fall 2009

packaging into a mortgage pool (link 3) which is rated by a credit rating agency (link 4) so that it can be sold to a pension fund or other institutional investor (link 5) and so on. The cliché that ‘a chain is only as strong as its weakest link’ is often true, but there is more to it in this case: chains can fail not only because of a weak link, but because the links don’t work smoothly with each other. If they are rusted or frozen, what you have is not a chain, but merely a series of elliptical pieces of metal. This is what happened with the current crisis: there was not a weak link in the chain, yet it failed. Borrowers got what they wanted: cheap and plentiful credit. Mortgage originators got what they wanted: lots of fee-generating origination. Banks got what they wanted: unprecedented numbers of individual mortgages to package and sell, reaping billions in fees. The credit raters got what they wanted: a lucrative new product area that became their single-largest profit source. And institutional investors got what they wanted: securities that yielded more than was available elsewhere in the investment-grade bond market. Economists have a term for this type of situation, wherein each individual decision seems rational, but the whole is crazy: ‘a fallacy of composition.’ The links kept on strengthening themselves—gorging on cheap credit, originating more and more mortgages, rating more and more structured products—even while the chain itself was freezing up. Traditional regulation tries to ensure the health of each link. The theory is that by regulating each link separately, the chain will be strong. In this type of ‘horizontal’ regulation, a regulator focuses on a particular link and issues a set of “thou shalt” and “thou shalt not” commands – such as banks needing to have so much in reserve. The health of the system is, mistakenly, taken for granted so long as each of the specific links is healthy. Horizontal regulation suffers from two inevitable forces that degrade its effectiveness over time. First, markets evolve more quickly than regulators can regulate. For example, credit default swaps were a non-entity a few years ago. Second, such command/control regulation often results in the regulated entities seeking to avoid the regulations so as to gain a competitive advantage over similarly-regulated competitors. So, for example, we’ve seen the banks use devices that allow them to lend more by gaming the regulator. There has also been extensive use of off-balance sheet items, proprietary risk calculation models, and various derivative transactions that have vitiated the intent of bank-reserve requirements. And this doesn’t even include the most pervasive way that credit-originating entities have avoided horizontal regulation: by simply refusing to be recognized as a bank. Hence the rise of the ‘nonbank financial institution’ in the 1990s and 2000s. Regulation should enable the various entities within the system to be accountable to each other and to hold each other responsible. We propose a new conceptualization of regulation, one that enhances the robustness of the interaction between market participants as well as the robustness of any particular set of market participants. We call this ‘vertical regulation’, and with it, we are looking not only to keep the links strong, but to provide oil to lubricate the links so that the chain keeps working.

Following are some potentially effective vertical reforms. 1. Enhance disclosure across the system.

One way to do this would be to mandate that for a financial instrument to be tradable or transferable, it must be registered. Various markets have systems for identifying tradable instruments, such as the CUSIP (Committee on Uniform Security Identification Procedures) number in the U.S. Requiring that any financial instrument be registered prior to being tradable or transferable would mean that its basic characteristics are known, that it is traceable, and that the size of the market is calculable. This would allow for the development of new instruments while assuring that market participants and regulators are aware of their size, shape and scope before they grow to a size that can affect overall financial stability. Also, it could be mandated that investors, speculators and traders should have to disclose material positions in a company no matter whether those positions are held in stock, options, or contracts, and whether those positions are short or long. 2. Regulate the power relationships between links, not the outcomes of those relationships.

In so doing, we would give some amount of deference to those whose capital is at risk. By mandating that all companies feature a UK-style advisory shareowner vote on pay, or allowing shareowners to nominate corporate directors more easily, we would change the dynamics and power relationship between shareowners, executives and boards of directors without predetermining the outcomes of those relationships. Another example would be to insist that all agents in the investment chain declare how they are paid. This includes fund managers, distribution channels, financial engineers, information providers, raters, etc. Agencies could develop to help consumers understand whether this remuneration is appropriate and likely to lead the agent to work in the principal’s best interest. 3. Focus on the functional purpose of each entity, not its legal status.

The requirements around the issuance of a credit instrument – the extension of credit, and therefore, the creation of counter-party risk – should be the same whether you are a bank, an insurance company, a hedge fund or a non-bank financial institution.If an asset is ‘off balance sheet’ but is managed as though it were ‘on balance sheet’, it should be treated in the same way. 4. Align interests. ??

Interests should be aligned across time frames as well as within and between entities. For example, all compensation agreements for executive officers of public companies could be subject to clawbacks to allow recouping of payment in the event of later restatements or financial distress, after the pay period has passed. 5. Do not allow intermediaries to affect accountability between other entities if they have nothing at risk.

In the U.S., brokers often vote proxies on behalf of retail shareowners. These so-called ‘broker non-votes’ are usually cast blindly for manage-

ment with little thought and less expertise. Also, in many markets with family-controlled companies, holding companies and pyramid structures dilute the voice of shareowners with real capital at risk. While it is true that these intermediary structures have some risk, they dilute real accountability by featuring disproportionate control. 6. Where known misalignments of interest persist, pay close attention.

While it will never be possible to eliminate all conflicts of interest, where they exist, they should be a particular area for scrutiny. For example, credit ratings affect which instruments various institutional investors may buy; yet the credit rating agencies are paid by the issuers of the debt, not the purchasers. As we have noted (and as the world discovered recently), this creates an incentive for ratings inflation. Vigilance in the Capital Markets

Regulation should be viewed as the societal codification of ‘the rules of the game’, and its goal should be to strengthen the game, not to determine the winners. As in sports, many rules are subject to interpretation: was the contact incidental or serious enough to be called a violation? Outside enforcement agencies are often the wrong entities to interpret subtleties for a number of reasons, not the least of which is that regulators often have binary options – something either is or is not allowed. Moreover, even the best referees can’t create world-class levels of play; that can only be achieved by the participants. Limiting this discussion to regulation would be akin to saying the only thing that matters in civil society are laws, police and courts, while ignoring a host of other influences. So, too, accountable capitalism requires the involvement of civil-economy institutions. • Market-based solutions can influence accountable capitalism. For example, the Centre for Fiduciary Excellence,

based in Toronto, has created a certification program to promote best practices in the investment management industry. More than 50 independent firms have received certifications in the two years since it was established. • NGOs can play a role, as they do in the political arena. For

example, the Aspen Institute has created a network of business school educators around sustainability and cultural issues, with the goal of encouraging values-based education. • Industry groups can be positive drivers of change. For

example, the International Corporate Governance Network (ICGN) has historically drawn its strength from institutional investors and has represented them, calling upon corporations to act responsibly. But more recently, ICGN has put increasing resources behind making sure that its members act responsibly, both to those to which they are accountable (the individuals whose savings those institutions invest) and to those they would seek to hold accountable Rotman Magazine Fall 2009 / 67

(public corporations), culminating in its issuance of a formal “Statement of Principles on Institutional Shareholder Responsibilities.” These efforts at promoting responsible investment need to be extended from the management of shares to the management of all securities. Meanwhile, The Ethisphere Institute and the Business Ethics Leadership Alliance are exploring ethical business standards from a corporate perspective. The coalition includes such global heavyweights as General Electric, Accenture and Pepsico. These and numerous other efforts promise to have greater impact than any regulations, no matter how well crafted. One World, Many Markets

If a new accountable capitalism is to emerge, it must occur on a global basis. Otherwise, institutions based in one country will continue the destructive short-termist tactic of building up a single link of the chain in one country and damaging all the others. This is precisely what the Icelandic banks did, and why they were able to offer higher interest rates to their depositors than their global competitors. There are two hurdles to creating an international framework for accountability: institutional and regulatory. Currently, no existing institution is ‘fit for purpose’. Each of the international regulators suffers from a myopic focus on one particular link in the chain, rather than having a panoramic vision of the whole system.The main regulators include the Basel Committee for Banks, IOSCO on securities, the IAIS for insurance, IFIAR for audit, and IASB for global reporting standards. There is one body charged with coordinating all these bodies, the Financial Stability Forum (FSF), whose goal is to “promote international financial stability” and “reduce the tendency for financial shocks to propagate from country to country.” The FSF has been around for about ten years, but as recent events indicate, it has been about as successful as the League of Nations was, and for similar reasons. First, it is unrepresentative: it offers seats to the G7, plus Hong Kong, Singapore, Australia, The Netherlands and Switzerland. The emerging markets aren’t there at all. Second, the FSF has no executive powers. Just as the League of Nations was reborn as the United Nations in 1945, so the FSF needs a new life with a proper mandate. That is what the G20 leaders agreed at their April 2009 summit in London’s Canary Wharf. Realistically, that mandate cannot become ‘the new unified global regulator’; this is both impractical and politically impossible, as regulatory structures and even the nature of the law differ significantly around the world. One size will fit no one, neither substantively or politically, and in any case, regulation alone is not enough. 68 / Rotman Magazine Fall 2009

What an international body can do is agree to principles. The OECD took that approach in its corporate governance efforts, which have been widely adopted. A principles-based international entity could be rigorous, not in writing regulations, but in investigating whether those principles are being applied in every country, agreeing that: • all actors in the financial system have responsibility for the tasks they undertake; • they are in turn accountable, and that those to whom they are accountable must take their responsibility seriously; • those who make them accountable need be provided with relevant information; • information should be provided by independent agents; • all financial institutions need to be ‘stress tested’, not only for solvency, but also for liquidity; and • civil society, regulatory institutions and central banking authorities should have powers and rights that give practical meaning to the above. In closing

Now is the time to design a new architecture to do for globalized financial markets what Bretton Woods did for the post-war economic settlement.We propose that the first step is to repurpose the Financial Stability Forum as a generator of principles for accountable capitalism. For it strikes us that any inspector, charged with judging whether the financial markets of the world in 2006 had met the principles described therein, would have concluded that many did not. Perhaps, had there been some such inspectorate, backed by the clout and authority of the world’s economic powers, the irresponsible behaviour that was allowed to thrive would have been put in check.

Stephen Davis is a senior fellow at the Yale University School of Management’s Millstein Center for Corporate Governance and Performance and the co-author of The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda (Harvard Business Publishing, 2006). He is chairman of Hermes EOS, the shareowner engagement arm of Hermes Pension Management, the UK’s largest retirement fund and a member of the International Advisory Board of NYSE Euronext. Jon Lukomnik, co-author of The New Capitalists, is the managing partner of Sinclair Capital LLC, and Program Director for the IRRC Institute. He sat on the official creditor committees for the bankruptcy reorganizations of WorldCom/MCI, and Adelphia, and is on the Boards of Sears Canada and the Van Eck family of mutual funds. David Pitt-Watson, co-author of The New Capitalists, is co-founder and former CEO of shareholder stewardship activities at Hermes Pension Management. This article is adapted from the Global Corporate Governance Forum’s Private Sector Opinion, Issue 13. GCGF is an International Finance Corporation multidonor trust fund facility located within IFC Advisory Services.

Idea Exchange

To some degree, we are all ‘creative narrators’ of stories that allow us to do what we want and that justify what we have done. – David Messick, page 75

Nicholas Christakis on the ‘three degrees of influence’

70 74 David Messick on the ‘ethics crisis’

77 Valerie Casey

on The Designers Accord

David DeRemer on the demand for green products

81 85 Russell Palmer

on the roots of bad behaviour

Nina Mazar on the dishonesty of honest people

89 93 Ole-Kristian Hope on stock recommendations

96 Dilip Soman

on the merits of earmarking funds

Mollie Painter-Morland on systemic leadership

99 103 Thomas Donaldson on the dangers of ‘undiscussables’

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Questions for: Nicholas Christakis

Q

&A An expert on the social factors that affect our health and longevity discusses how relationships influence everything from smoking to obesity and happiness. Interview by Karen Christensen

70 / Rotman Magazine Fall 2009

How do you define a social network?

The conventional definition is ‘a collection of individuals’, but the key element is the specific ties between those individuals. Networks are composed of ‘nodes’ (people) and ‘edges’, or the ties between them, and what distinguishes a network from an ordinary group is these ties. People are embedded in complex social networks involving their friends, family, co-workers, and neighbours, and through those individuals, in turn, to their friends, family, co-workers, and neighbours, and thence on outwards, endlessly, into a vast fabric of humanity. This sort of structural perspective is crucial for a better understanding of medicine and public health. Everything from information to behaviour to germs flows through these networks, but this is rarely taken into account by policy makers or even by entities with a collective perspective, such as insurers. How does influence work within social networks?

We are highly influenced by the people in our social network. Students start studying when their roommates start to study; people get tattoos when their friends get tattoos; and people gain weight when their friends gain weight. Pairs of people emulating one another can coalesce to form large groups comprising tens, hundreds, or even thousands of individuals. Much of our behaviour – good and bad – can be traced to our social networks. Drug use, for instance, is not about isolated individuals deciding to use drugs; it’s about groups of people reinforcing this behaviour, and such norms spreading from person to person. We need to realize that if we can get one person to stop using drugs, others around them are more likely to stop, so every dollar spent on treatment can go much further than we ever thought.

Getting one person to quit smoking, lose weight or become less depressed may improve the lives of numerous others connected to that individual.

There is a long tradition of using ‘snowball samples’ in the study of illicit drugs – an approach that involves asking one user who they inject drugs with and then asking those other users to identify still others. Researchers already use this technique to map social network ties and to understand the spread of pathogens such as HIV and Hepatitis C in communities of substance abusers. But this approach can also be used to map the spread of something equally deadly: the inclination to use drugs in the first place, or the knowledge of where to acquire them. This approach can be used among teenagers, the general population, even sports teams. Social networks can also be used to understand the use of legal drugs. For example, whether elderly people with arthritis use certain kinds of drugs for pain relief may depend on whether their acquaintances or friends are doing the same. Drugs used for preventive care, such as aspirin to prevent heart attacks, might follow similar patterns of use; and whether a doctor prescribes a drug may depend on whether doctors he or she knows – and whether doctors they in turn know – are prescribing it. Of course, social influence isn’t always negative: if a business implements a wellness program, it is likely to see benefits that accrue beyond the individuals using the program. In fact, the benefits can even extend outside of the workplace. A recent study of healthy-behaviour interventions administered to firefighters found that not only they, but also their spouses, improved their lifestyles. How does the economic term ‘externalities’ relate to health?

Consider an example: a factory making widgets pollutes the environment. This cost is borne by people who are downstream or downwind. The cost is not borne by the faraway

consumers who purchase the widgets; nor is it reflected in the factory’s balance sheet. In Social Science parlance, these costs are ‘externalities’ – they are consequences that affect parties other than those engaged in a transaction. Another example is this: you make an investment to improve your garden, and your neighbour not only enjoys a better view but also benefits because the value of his home rises. Strictly speaking, according to economic theory, you should tax your neighbor to recover some of the value created. This idea can be extended to health care: the care we give to one patient can have adverse health consequences on another ‘negative externalities’ but may also have beneficial health implications ‘positive externalities’ for those to whom a patient is connected. For example, treating women for postpartum depression may mean that they are likelier to vaccinate their children or treat their asthma, thus saving some children’s lives; replacing an elderly man’s hip or fixing his cataract may reduce not only his disability but also his wife’s; preventing a woman’s stroke may benefit not only her but her friends. Likewise, getting one person to quit smoking, lose weight or become less depressed may improve the lives of numerous others connected to that individual. Human beings tend to form bonds with people that are similar to them. What are the health implications of such ‘homophily’?

Homophily has been recognized for centuries, and it basically means that ‘birds of a feather flock together’: good students hang out with other good students, rich people hang out with rich people, conservatives with conservatives, and so forth. There is nothing particularly new about this, but what is interRotman Magazine Fall 2009 / 71

Social influence isn’t always negative: if a business implements a wellness program, it is likely to see benefits that accrue beyond the individuals using the program.

esting is that there may be Biology behind it. In the case of understanding interpersonal health or economic effects – or any effects for that matter – we need to account for homophily. For example, if we find a bunch of poor people hanging out together, there are at least three possible reasons for this cluster of poverty: one is that they befriended each other because they were similar; another is that they were all exposed to something that made them poor at once – perhaps there was a plant closure in their neighbourhood and everyone lost their job; or thirdly, one person’s poverty may have actually caused another person’s (for example, if one person lost her job and started borrowing money from another, and then defaulted on the loans.) Something very similar, of course, happens with our health. When we find a group of people with poor health clustered together, we can ask these same questions: did they befriend each other because of their poor health? Were they all exposed to something that caused their health to become poor in parallel? Or did the poor health of one individual cause the poor health of another? It’s this latter possibility that I, along with my colleague, James Fowler [a political scientist at the University of California at San Diego] am most interested in. You are also interested in how the happiness of the people around us affects our health. How does that work?

There are a variety of possible mechanisms by which one person’s emotional state can influence others. There are some basic ideas about ‘emotional contagion’ and there is good reason to believe that a lot of this is genetic – that we are hard-wired as human beings to detect and mimic the emotions of others. In addition, there are more instrumental possibilities: maybe happy people are more generous with their friends in terms of time or attention, and therefore one individual’s emotional state 72 / Rotman Magazine Fall 2009

can spread to others. Our work has focused mostly on documenting such network properties of emotion. In addition to happiness, we’ve looked at things like altruism and generosity, voting behaviour and depression, and we have found that emotions have not just an individual identity but a collective identity. So whether or not you are happy in some sense depends on which patch or region of a social network you happen to occupy. If you’re in a ‘happy region’, you are more likely to be happy. The analogy I often use is flocking birds: if you see a large group of birds flying in one direction, you don’t think that any individual bird is choosing to fly in a particular direction; you think the entire flock is flying in a direction. Analogously, with human beings there could be kind of ‘ripples’ in a network where they all collectively have a particular emotional state. Perhaps we should no more think to ask a person why they are happy than we would think to ask a bird why it is flying East rather than West. Describe the ‘three degrees of separation’ rule.

James and I have been exploring the notion that, while on average there might be six degrees of separation between all human beings on Earth, there might be only three degrees of influence. We’ve looked at conditions as diverse as obesity, smoking and happiness, and we have found that your weight status, your smoking behaviour and your emotional state seem to be associated with your friends’ weight/smoking/emotional states; your friends’ friends’ weight/smoking/emotional states; and your friends’ friends’ friends’ weight/smoking/emotional states. For instance, the risk for smoking in a person connected to a smoker (that is, at one degree of separation) is 61 per cent higher than would be expected as a result of chance; it is 29 per cent higher if the friends of that person’s friends smoke; and 11 per cent higher if the friends of the person’s friends’ friends smoke. By the fourth degree of separation, there is no longer an increase in risk.

You have said that because individual health depends not just on a person’s own biology and actions, but on the biology and actions of those around him, “collective and not just individual interventions are important.” What sort of collective interventions?

Studies show that by targeting groups of people all at once, rather than one at a time, interventions are more likely to be successful. Examples include Weight Watchers and Alcoholics Anonymous, which are explicitly designed to create social network ties. If you think about it, what they are is artificial social networks: we create these groups of people and cultivate ties between them, and we now know that these interventions are more effective than isolated attempts to change behaviour. Part of the reason is that networks tend to magnify whatever these people are dealing with. It’s just like a germ: if you have a network population and you infect one person, the germ can spread and keep infecting many more people. Let’s say you have $100 to spend to get a group of ten people to quit smoking. You bring in the first person and try to persuade him to quit, and then the next person and the next. With this approach, you might get three of the ten to quit, so the cost would be $33 per person. But if you brought all of them in together and formed a network of ten people, chances are that five of the 10 would quit. So now it only cost you $20 per person instead of $33. It is much more cost-effective to intervene in groups.

connected people are – the more family and friends they have, and the more central they are in the network – the larger these effects will be. If we were to replace the hip of a hermit or get him to quit smoking, no one else would have their health improved as a result. It usually makes more sense to vaccinate the highly-connected ‘hubs’ in a social network rather than individuals at the periphery. Does this mean that a connected life is more valuable than an unconnected one?

That is a troubling moral question. In some ways, people who are well connected already get more and better care: the married seek out and are given better-quality medical care than the widowed; people with connections are better able to find good doctors; and people with friends have better health than the friendless. So why not replace an inexplicit privileging of socioeconomic position with an explicit privileging of network position? Although giving an extra healthcare dollar to a rich person rather than a poor person does not increase the overall health or distributive justice in a society, giving an extra healthcare dollar to a connected person does. However, this conclusion makes me very uneasy. If anything, the healthcare system should function as a safety net, providing the kind of benefits to less-well connected people that they cannot otherwise obtain from their own family and friends. What are the implications of all this for business?

Are some people within our networks more influential on our health than others?

This is very likely, and a social network perspective suggests that it may be possible to exploit variation in people’s social network position to target interventions where they will be most effective in generating benefits for the group. If funds are limited, as in the example above, it may be best to target the people who are most likely to influence others. For example, teaching the key people in an African village to use treated bed nets against malaria; teaching highly sexually-active people to use condoms; or teaching popular children in schools to wear seat belts. People are interconnected, and so is their health. So, the good news is that we can benefit from health interventions on members of our social network?

Yes. When illness in one person is treated or prevented, others to whom that person is connected also benefit. But the better

There are many, but to name just a few: workplace-safety initiatives might benefit from the understanding that one person who adopts safer practices can influence many others to do so; efforts to foster creativity or innovation might depend on the degree of separation of the relevant parties; and groups of customers might be strategically targeted so as to take advantage of their influence on one another. Clearly, the influence of social networks is enormous and should be carefully considered – in business and in other arenas of life.

Nicholas Christakis is a professor in the Department of Sociology in Harvard’s Faculty of Arts and Sciences; professor of Medical Sociology in the Department of Healthcare Policy at Harvard Medical School; and an attending physician in the Department of Medicine at Mt. Auburn Hospital. Time Magazine named him one of the 100 most influential people of 2009.

Rotman Magazine Fall 2009 / 73

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Questions for: David Messick

Q

&A The business ethics pioneer discusses modernday codes of conduct and the importance of ‘mechanisms of dissent’. Interview by Karen Christensen

Clearly, we are in the midst of an economic crisis, but are we also in the midst of an ethics crisis?

I certainly would, because at the heart of this crisis lies a failure of accountability and responsibility. People have been acting as if the consequences of the risks they were taking belonged to somebody else, not to them. This was particularly damaging in the way mortgages were securitized and then passed on and sold. Everybody in the chain knew that once they sold them, it was no longer their responsibility, so nobody had an incentive to verify the quality of what they were selling. In 1997, you edited one of the first-ever books on the psychology of business ethics. What is the biggest change in this field since the book came out?

I think there has been a positive move in the direction of trying to understand the psychology of decision-making – how and why people yield to temptation, and why they do things that they shouldn’t. There has also been a move away from trying to create ‘moral theories’, which is more the role of philosophers. Another big change is that many corporations now realize that it can be profitable to be socially responsible, to be ‘green’ or whatever language you want to use. I believe this is happening partly because of conscience and partly because it looks like this is where profitability will be centered over the next 50 years. In today’s environment, causality is multifaceted and difficult to determine. How, then, can we go about assigning accountability?

I wish I knew. There is an old concept called ‘moral hazard’ that I’ve been thinking about lately. This arises when the consequences of a person’s decisions are eliminated from or shielded from the decision-maker. For example, in the savings and loan situation, when the government decided to insure the savings, people started making risky investments that fell way outside of where they traditionally would have, because they knew that if there was a downside risk, the government would pay for it. That’s a moral hazard, and somehow, the assignment of accountability within an organization has to address this. You and your colleagues have said that ethical decision making requires attention to quality (considering a wide range of consequences), breadth (considering effects on all stakeholders) and honesty (one’s moral compass). Which element is most often disregarded these days?

I would have to say it’s the honesty aspect, because there are 74 / Rotman Magazine Fall 2009

We introduced the term ‘ethical fading’ to define the process by which the ‘moral colours’ of a decision can fade into bleached hues that are void of moral implications.

so many ways for people to misrepresent what they’ve done via the language they use. Along with University Notre Dame professor Ann Tenbrunsel, I recently wrote a paper about selfdeception and the ease with which we can fool ourselves about what we’re doing [“Ethical Fading: The Role of Self-Deception in Unethical Behaviour”]. In many cases, individuals fail to see the moral components of a decision – not so much because they are morally uneducated, but because psychological processes fade the ethics from an ethical dilemma. We introduced the term ‘ethical fading’ to define the process by which the ‘moral colours’ of a decision fade into bleached hues that are void of moral implications.

sion. Even managers who recognize that more or better information is needed may seek that information in a way that is slanted toward affirming their existing beliefs. In one study, people were asked to predict their performance on a fact-based questionnaire; those who claimed 75 per cent accuracy wound up scoring 60 per cent, while those who predicted 100 per cent scored 85. Our self-perception often doesn’t include sufficient modesty or self-criticism with regard to our abilities, and thus the overconfidence bias clouds our judgment. People can, and should, learn to regularly question their judgment.

How do you define self-deception?

Lawyers are advocates, so there’s been a whole set of metaphors within Psychology about ‘intuitive accountants’, ‘intuitive judges’ and ‘intuitive lawyers.’ The idea of an intuitive lawyer was Rod Kramer’s idea. He basically said that people become advocates for positions that benefit them and, like lawyers, they are willing to downplay facts that are inconsistent with their interests and highlight and exaggerate the importance of facts that are consistent with their best interests.

Self-deception involves a lack of awareness of the processes that lead us to form our opinions and judgments. This often involves avoidance of the truth – the lies we tell to and the secrets we keep from ourselves. This practice is common, normal and pervasive in individuals’ lives. To some degree we are all ‘creative narrators’ of stories that allow us to do what we want and that justify what we have done. We believe these stories, and thus we believe that we are objective about ourselves. In my work with Prof. Tenbrunsel, we found that self-deception is instrumental in the process of ethical fading. An ethical decision often involves a tradeoff between self-interest and moral principles, but by avoiding or disguising the moral implications of a decision, people can behave in a self-interested manner and still hold the conviction that they are ethical. Ignorance and false beliefs about oneself can create errors in judgment concerning moral responsibility and in estimates of the amount of harm that will be caused. Self-deceit, therefore, stands in the way of morality. If individuals could rid themselves of self-deceit, they would be capable of leading nobler lives. What are some of the biases that affect the integrity of our decisions?

Overconfidence is a big one. Most people are overly certain of their knowledge, which causes them to avoid gathering additional information about an issue before making a critical deci-

You have referred to decision makers as ‘intuitive lawyers’. Please explain this concept.

What are ‘language euphemisms’?

These are the ‘disguised’ stories that we tell ourselves about our unethical actions – an edited version of the ‘real’ story, devoid of all ethical implications. By renaming the actions we take and relabeling our decisions, euphemistic language can make harmful conduct respectable. There is a rich library of illustrations of this tendency in business and other professions: we engage in ‘aggressive’ accounting practices, not illegal ones; there may be some ‘externalities’ associated with a strategy, rather than actual harm to others or the environment; we have ‘collateral damage’ in military campaigns, not civilian deaths. The fact is that it’s very easy to find the words to colour a story in such a way that it becomes appealing to the narrator and consistent with the narrator’s morality. Business schools have been accused of using ‘cold’ language that affects the way students think. Terms such as ‘transaction costs’, ‘profit maximization’ and ‘rationalization’ are argued to Rotman Magazine Fall 2009 / 75

be devoid of the human and potential ethical dimensions of decisions. A case in point is the term ‘right sizing’ – the favoured term for layoffs – which focuses attention toward the economic benefits and away from the human costs of putting people out of work. Social scientists have uncovered the powerful role of language in the decision-making process. In a study of cooperation rates in prisoner-dilemma games, they demonstrated that the differences in cooperation rates could be explained by the words used to describe the games. When faced with choices of ‘accepting’ or ‘rejecting’ offers, individuals were less likely to cooperate than when the choice was described as ‘claiming’ part of a shared resource, even though the outcomes were identical. Language euphemisms themselves are not dangerous. We need metaphors to help us simplify the complexity of our world. What is dangerous is when these metaphors hide the moral or ethical implications of our decisions. What leads certain people to view themselves as ‘above the rules’?

may be ethically unsound. Managers can also try to envision how they would react if their actions appeared on the front page of the newspaper the next day. One insightful executive offered the following guidance for determining ethicality: “If there is any doubt, there is no doubt.” People will often accept troubling risks if they believe there is a potential for a significant gain. What is the best way to fight this human tendency?

This leads us back to the accountability issue. There has to be accountability for decisions. Think of it this way: if you are about to ascend a steep slope, and you don’t carefully prepare your climbing equipment, you will be the one to fall and perish. This knowledge creates one hell of an incentive for you to be careful about what you’re doing. We need to somehow bring this concept into the business world. The decisions that people make have to start standing for something, and people must be held accountable for the consequences.

Erroneous views of the self, including overconfidence. There’s a huge amount of research that shows what some people have called ‘the Lake Wobegon effect’: basically, people tend to think they’re above average in many ways. For example, most people think they’re above-average drivers, or that they have an above-average sense of humour. There was some wellknown research done in Sweden 20 years ago, which found that if you ask drivers where they stand against their peers, 90 per cent believe they’re above average. Likewise, if you ask faculty where they fall, 90 per cent think they’re above average. I think the feeling of being above the rules is just an exaggeration of the pervasive tendency to think that we’re a bit superior to other people. Furthermore, for people in responsible positions, there is a tendency to ‘believe their own press’ and to believe what they’re told by their underlings – namely that they’re special and unusual and that they somehow deserve more than ordinary people. If an executive views himself as being above conventional ethics, he may only follow self-imposed rules that others would view as self-serving. For instance, he may see his valuable contribution to the firm as a valid excuse for inflating an expense account or using company resources for personal benefit. He might even justify deceiving shareholders or employees by altering financial reports to achieve important financial gains ‘on their behalf ’. Or, he may do something immoral or illegal, convinced that he will never be caught. As we have seen, this happens all the time.

Why is it so important for leaders to create ‘mechanisms of dissent’ within their organizations?

Is there a way to counteract the overconfidence bias?

David Messick is Emeritus Professor of Management and Organizations at

Managers can use their conscience to test whether or not a particular decision is ethical. They can ask themselves, Would my key stakeholders accept the idea or decision I am about to make? If the decision cannot withstand public scrutiny, then it

the Kellogg School of Management, Northwestern University. He sits on the editorial boards of several leading journals including Business Ethics Quarterly, Journal of Behavioral Decision Making and Social Psychology Review. Psychology Press will publish a book in honour of his career later this year. An excerpt from that compilation appears on page 28 of this issue.

76 / Rotman Magazine Fall 2009

All you have to do is to look at the last eight years of the U.S. Government to see why this is important. You don’t get very good quality decisions when people surround themselves with people who just agree with them constantly and tell them how right they are. You get an insulated kind of decision-making characterized by an absolute certainty that a course of action is correct, whether it has any bearing on reality or not. Managers should always consider ways in which their decision or assumption might be wrong. This means really encouraging people to express differing points of view. This isn’t easy; it takes a lot of courage and cognitive work. For example, last night I was in Massachusetts and I had dinner with a good friend. We’re very close – we’ve done a lot of research together over the years, but every so often we have a very different opinion about a book or a movie. Those discussions are difficult, because you want the people you like and respect to agree with your opinions, to confirm them. Switch the focus to the business world: to intentionally surround yourself with people who may disagree with you, but who would make the quality of your own decisions even better is a hard thing to do. I see in the current U.S. administration a tendency to have that brand of courage – a kind of intellectual honesty that we didn’t see in the previous eight years. That gives me great hope.

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Questions for: Valerie Casey

Q

&A The creator of the Designers Accord talks about her efforts to change the values of the next generation of design thinkers.

Interview by Karen Christensen

You created the Designers Accord, a sort of Kyoto Treaty for designers. What led to this, and what are your hopes for it?

In July of 2007 I wrote an article called “The Designer’s Dilemma,” which I published online. In it, I talked about how in this time of environmental and social crisis, designers had become paralyzed, and hadn’t taken certain actions that I felt were both appropriate and necessary. I was speaking very much from my own feelings of personal frustration, about the limitations I was experiencing as a designer who did not possess the knowledge required to have well-informed conversations with my clients around issues of sustainability. I wrote the article in response to a sort of ‘tyranny of the iPod.’ Because of various market and cultural conditions, designers have grown to focus on a single game-changing object – instead of making incremental changes that can actually have a huge positive impact on the systems that promote sustainability. At the end of the article, I included a “Kyoto Treaty for Design”, which was a call to arms; in January of 2008, I renamed it the Designers Accord. The concept for the Accord is rather simple: harness the collective intelligence of the creative community to make positive, triple-bottom-line impact. The Accord inverts the traditional model of industry competition and instead supports sharing best practices and experiences so that we can learn from each other. The theory is that this model will help us innovate more efficiently and effectively. My hope is that the Designers Accord will be the vehicle by which the creative community integrates the principles of sustainable design and design thinking into every product and service, and all aspects of practice and production. Rotman Magazine Fall 2009 / 77

The Designers Accord Guidelines For Design Firm Adopters: 1. Publicly declare participation in the Designers Accord.

4. Consider your ethical footprint. Begin by measuring the carbon/greenhouse gas footprint of your firm, and pledge to reduce it annually.

2. Initiate a dialogue about environmental and social impact and sustainable alternatives with each and every client. Rework client contracts to favour environmentally and socially responsible design and work processes. Provide strategic and material alternatives for sustainable design.

5. Advance the understanding of environmental and social issues from a design perspective by actively contributing to the communal knowledge base for sustainable design.

3. Undertake a program to educate your teams about sustainability and sustainable design.

1. Publicly declare participation in the Designers Accord.

4. Consider your ethical footprint. Begin by measuring the carbon/greenhouse gas footprint of your firm, and pledge to reduce it annually. 5. Advance the understanding of environmental and social issues from a design perspective by actively contributing to the communal knowledge base for sustainable design. For Corporate Adopters:

For Educational Institution Adopters:

2. Initiate a dialogue about environmental and social impact and sustainable alternatives with every student and colleague in your educational program. Rework curricula and assignments to emphasize environmentally and socially responsible design and work processes. Provide course content, lectures, and assignments that focus on strategic and material alternatives for sustainable design. 3. Undertake a program to educate your colleagues about sustainability and sustainable design, and plan the integration of these concepts into course curricula.

1. Publicly declare participation in the Designers Accord. 2. Provide strategic and material alternatives for sustainable design of products and services, and pledge to help customers reduce their negative impact. 3. Undertake a program to educate your teams about sustainability and sustainable design.

Adopters of the Accord must commit to five guidelines. Please describe them.

There are guidelines for each category of adopters: designfirms, corporations and educational institutions (see Figure One). Basically, there are three tiers of activities that blend personal accountability with community contribution. Building on the principles of human-centered design, each adopter starts with educating their teams about sustainability and sustainable design, and measuring their ethical footprint, beginning with their carbon footprint. One’s carbon footprint is not necessarily an indicator of doing ‘good’, but it is a useful activity to increase self-awareness. Adopters pledge to reduce their footprint annually. The amount reduced is a relative measurement; the diversity of our community makes determining absolute standards too challenging at this stage. Next, adopters commit to talking to all of their customers about sustainable alternatives. That’s not to say that every product must have social impact – the goal is just engage people in these conversations. Finally, we ask all adopters to participate in the community by sharing their stories and methods. We have 78 / Rotman Magazine Fall 2009

4. Consider your ethical footprint. Begin by measuring the carbon/greenhouse gas footprint of your institution, and pledge to reduce it annually. 5. Advance the understanding of environmental and social issues from a design perspective by actively contributing to the communal knowledge base for sustainable design.

continuous conversations and activities online and offline to support people as they work through the guidelines. It has been said that the Designers Accord is on a path to change the way everything is made – from toothbrushes to airplanes. What sorts of changes can consumers expect to see first?

Designers will typically work with clients to help them shape consumer behaviour in some way – encouraging a consumer to use a different product or engage with a different service or environment. What we’re trying to do is to get designers to consider the larger context of our decisions and recommendations. I often say that the Accord is not about design, it’s about designers – it’s about changing the value system of the creative community. In terms of walking into a Best Buy or a grocery store or exploring a new home development, there won’t be specific products that you can look at and say, “oh, there’s a Designers Accord product,” because it’s got our seal of approval on it. The Accord will not function like the LEED rating in architecture or the ENERGY STAR label. What we are trying to do is

This way of thinking is not just about changing the way something is styled but changing patterns of consumption.

highlight the context for design and development, so that people all along the supply chain make better decisions. Getting manufacturers to use less packaging and have fewer duplicated products are some small steps. More importantly though, we want to encourage new service models, like renting instead of owning. A great example of this involves toys, which, as a parent of young children, I can appreciate. At BabyPlays (babyplays.com), you can actually rent toys, which is fantastic because , kids play with most toys for a couple of weeks, if you’re lucky. There is a similar phenomenon in Europe with ‘toy libraries’. This way of thinking is not just about changing the way something is styled but changing patterns of consumption. We are trying to create positive environmental and social impact without defaulting to abstinence; we are designing for optimism and satisfaction, not just conspicuous consumption. The good news is, that better service models translate into better experiences. Instead of just throwing something away, imagine a world where a consumer product actually takes on more value over time. Corporate adopters of the Designers Accord include Johnson & Johnson, Steelcase and Mohawk Paper. Are employees of the typical business ready for the changes ahead?

We are currently experiencing a ‘perfect storm’ – broad cultural awareness of climate change, a global economic recession, and varied humanitarian crises – that forces changes to be made. Clearly, the times of ‘choosing’ to address these issues are over: we all have to pay full attention. I am very hopeful about the new thinking that I witness in conversations I have with organizations every day. Some of the people you would least suspect are making changes in their activities, and one reason for this amazing uptake is the diminishing separation between our home lives and our work lives. The changes in behaviour between work and home are blending: decisions made at home are being brought into the work environment, and organizations with great workplace prac-

tices are influencing their employees and the communities in which they live. For business, one of the greatest sources of environmental impact is air travel, which generally represents more than half of a firm’s overall impact. What would be a designer’s approach to this issue?

The crux of the problem is that when you are trying to describe abstract ideas to people, it’s much easier to do it in person, because you can read body language and follow people’s cues. As a result, the ‘natural substitute’ to flying – the conference call – is actually quite limiting. Having said that, at IDEO we are starting to use a lot more video communication. I’ve heard great things about products like HP’s Halo and Cisco’s TelePresence, but even just using iChat on your MacBook can provide a sense of what someone’s trying to say, because you can see their face. More and more, we’re having conversations with clients and partners using these digital technologies, and then deciding how to engage. We don’t just ‘fly in for a meeting’ anymore and fly right out. Instead, we might co-locate or stay for a week-long workshop, where we’re actually spending a lot more time with people. We still place a premium on the human connection. As the Designers Accord spreads to the academic community, what sort of conceptual tools and standards will tomorrow’s leaders be exposed to?

I think about it in terms of a five-year plan. My hope is that after five years, we will have integrated the principles of sustainability into all practice and production. That’s not to say that after the Designers Accord there won’t be other movements or activities, but it is our purpose to be foundational in building awareness and sharing best practices around this topic. Our big push in 2009-2010 will entail working with academic institutions to change the way the next generation of creatives thinks and acts. Our goal is to leverage the ‘mindRotman Magazine Fall 2009 / 79

share’ and experience of our diverse and growing community, and to codify an actionable plan that creates a standard for departments, studio curricula, and assignments that emphasize environmentally-and socially-responsible design work and processes. We are tackling questions like: • How might we integrate sustainability into all classes, programs and campuses? What would the process look like, and what is the starting point? • How will we measure our impact? What will constitute success? • How can we create experts in sustainability, and at the same time, a general-but-rich knowledge base around sustainability? • How can we help degree programs and schools articulate their strategic mission to their trustees and other stakeholders? In the academic community, we’re gathering a brain trust of schools all over the world, each of which has a different approach and is at a different stage of resolution around sustainability. For some, it’s a huge achievement just to speed up the greening of their campuses; some are now separating compost and recycling, or they’re sourcing recycled paper for their print and computer centres. Others are a lot further ahead in integrating the principles of sustainability into select programs or into their basic curriculum. There are multiple points to access this dense and complex topic – covering everything from the physical environment, to training professors and enabling students in a new way, to talking about the importance of these issues with trustees. Are you pleased with the Accord’s progress to date?

Wholeheartedly, yes. For me, the best evidence is the quality of conversations that are happening and the collaboration between organizations that have previously been fierce competitors. For example, we recently had a roundtable discussion at Adobe. It was four hours long, and there were designers that had worked together and against each other for different projects. We were discussing ‘when is the right time to integrate sustainability into the designer’s workflow?’ Everyone was contributing, and cooperation quickly overtook competition. Our most effective interventions are physical activities like that, where organizations, firms or schools volunteer to hold small events and think-tanks to tackle a range of challenges. 80 / Rotman Magazine Fall 2009

The driving force for everyone involved is the opportunity to share knowledge and prototype new ideas and approaches. This quality of our coalition is the most exciting and promising part for me. Reflecting on the current economic crisis, Alice Rawsthorn recently wrote in the International Herald Tribune that “design has always coped well with austerity and is especially well-equipped to do so now.” Can we design our way out of this mess?

Yes, I believe we can. My mentor and great supporter of the Designers Accord, environmentalist and activist Paul Hawken, wrote in the introduction to his seminal work The Ecology of Commerce that we don’t have an economic problem or an ecological problem, but a design problem. I think Paul is absolutely right, and in fact designers probably have the most prepared minds to take on these complex challenges, because we are naturally systems thinkers and we are unwaveringly optimistic. Concurrently, I think that we are experiencing a great maturity in the creative community, where we are recognizing that we are really not in the business of making things anymore, we are actually in the business of making consequences. This army of 150,000 people that has mobilized around the Designers Accord – which has had no advertising except for word of mouth – is truly global. There are 100 countries represented. Just think about the appetite for change that this represents – the fact that people are taking this on and doing all sorts of things voluntarily. They are taking personal action and contributing actively to the commons. I truly believe that not only will we design our way out of this mess, but we will design a new way to do business and to think about how we communicate with each other that has impact well beyond the traditional boundaries of our professional communities. We are going to design our future by reflecting on the past, but not resting on it.

Valerie Casey leads the digital experience practice at IDEO. She founded

the Designers Accord, a global coalition of more than 150,000 designers and organizations from 100 countries focused on integrating sustainability into their practices. An adjunct professor at the California College of the Arts, in 2008 she was named a Fast Company magazine ‘Master of Design’ and one of Fortune magazine’s ‘Gurus You Should Know’.

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Point of View David DeRemer

VALUING THE PLANET: THE ROLE OF ECONOMICS SUDDENLY, EVERYONE IS ‘GREEN’: it’s a topic at dinner parties, fuel for water-cooler debates and an emerging component of personal style. A quick scan of leading business publications demonstrates that being green has caught on in the corporate world, as well. But is all this chatter really a win for sustainability, or is it simply the latest marketing ploy by smart executives? One thing is certain: The efforts of Al Gore , the Discovery Channel and others have fostered an unprecedented affection for our planet over the last few years. Consumer awareness has gone up accordingly, and the market has answered with products and services that feature sustainability as a differentiator. From buildings and houses to cars, clothing, furniture, light bulbs, food and cleaning supplies, virtually every category of consumption has at least one major competitor offering sustainable alternatives. Clearly, major corporations and the advertising agencies they employ have been hard at work. Indeed, the number of green-focused agencies has increased tenfold since 2003. The risk, of course, is that this ‘green boom’ is simply a passing

trend, supported by the smoke and mirrors of powerful marketing departments. An eco-friendly stance is pretty easy to sell, but it remains to be seen whether this seemingly-broad corporate commitment represents an actual shift in policy. In a recent survey, 65 per cent of adult Internet users said they ‘only sometimes’ believe green advertisements, while 12 per cent said they ‘never’ believe them. Why the skepticism? Perhaps because nothing really seems to have changed: when people look around, they see the same old focus on how much is bought rather than what is bought or how things are used. Empty buildings still light up our city skylines; highways still choke with single-occupant SUVs; paper, plastic and glass still find their way into landfills; and oil is still the economy’s lifeblood. In fact, the U.S. Department of Energy projects that primary energy consumption will continue to rise, reaching 118 quadrillion BTU, with 6.85 trillion metric tons of CO2 emissions by 2030. These numbers already take into account projected reductions and efficiencies, and the results are simply staggering. What’s worse, the consumption levels they reflect are for the U.S. only; surely the haze visible during the 2008 Olympic soccer games in Beijing didn’t go unnoticed. Rotman Magazine Fall 2009 / 81

If consumers don’t start to see results soon, it will become increasingly difficult for firms to sell their eco-friendly products. Marketing that is unsupported by corporate action or tangible results will fuel concerns over the real value of going green. The current environmental craze needs to be molded into a lasting international movement that ingrains sustainability into our processes of production and consumption. Supply and demand caused our environmental problems in the first place, and they are ultimately the only forces that can fix it. With the perpetual quest to produce, consume and grow has come a deepening dependence on an infrastructure that is extremely damaging to the planet. Indeed, it seems that almost every product can be tied to environmental damage: cars and airplanes consume huge quantities of fuel; the miracle of plastic pollutes for centuries; rapidly-obsolete electronics seep mercury into water supplies; even cows are polluters. North Americans consume a tremendous amount of products derived from animals – and livestock emits 18 per cent of all harmful greenhouse gases – more than automobiles and other kinds of transportation. The fact is, many of the things we can’t live without come with tremendous environmental tradeoffs. While it’s easy to blame corporations, the supply side is only half of the equation. There are certainly examples of gross corporate exploitation, but for the most part, companies have simply created supply to satisfy demand, or created supply where they anticipated demand would one day be. Most consumers have been happy to reap the benefits of cheaper products and increased commercial availability. In fact, current environmental conditions can be largely attributed to a history of consumers prioritizing immediate desires over long-term considerations. Booming economics and misaligned perceptions of need have generated a set of consumer standards whereby the impetus to protect the environment has never been more powerful than the desire to 82 / Rotman Magazine Fall 2009

consume a high-fructose corn syrup breakfast cereal. While the laws of supply and demand have driven society to harm the environment, they also contain the power to correct the problem. If companies can find true economic value in shifting to green products, more sustainable products will find their way onto store shelves. If consumers decide that sustainability is a critical feature of the products and services they want to buy – not just sometimes, but always – then the situation can change: buying patterns will adjust, and companies will adapt to meet the need. Green Supply

Corporations seeking to go green have their work cut out for them. Executives face the constant pressures of The Street to achieve profit targets, and profits increase when operating costs are low and sales high – two things that have historically worked against green production. For many companies, changing the game now to focus on green products would require massive financial commitments and carry tremendous risk. Years of product development, economies of scale, and process innovation have created a set of environmentallyunfriendly mainstay products and processes that can’t simply be abandoned now that people have watched An Inconvenient Truth. So it’s easy for businesses to perpetuate the sustainability issue with lower-cost, non-green products as they seek a return on their investments. For many companies, financial success means continuing business as usual, regardless of the effects on the environment. In some cases however, companies have proven that green marketing can pay off. GE’s widely known Ecomagination campaign, which promotes sales of eco-friendly products, crossed the $14 billion mark in 2007. Even better, GE raised its 2010 revenue forecast for the effort from $20 to $25 billion Green products and services are finally starting to prove they can be a true source of value.

For most of the world’s population, price is – and will continue to be – the most important consideration when making a purchase. And for now, green products are still too expensive to be ubiquitous.

At the same time, natural scarcities and rising costs are changing the playing field for operations, as well as sales. As the cost of oil has climbed steadily, so has the cost of production, transportation, and operations. As COOs search for ways to reduce expenses, energy consumption has taken the spotlight – not as a ploy to entice consumers, but as a real tactic for cutting costs. While marketers may claim that real change was the goal all along, the term ‘greenwashing’ was coined long before oil reached $100 per barrel. The mobile telecommunications industry is a great example. Due to the rising cost of energy, collective operating expense across worldwide networks is expected to top $22 billion by 2013. In fact, some carriers in Africa report energy rates as high as 50 per cent of their total operating costs. Going green is rapidly becoming an essential business strategy, and carriers are asking infrastructure providers to develop more energy-efficient equipment. As a result, average power consumption is expected to drop by 10 per cent in the next five years alone. Unfortunately, such improvements in efficiency are overwhelmed by subscriber growth – but it’s a step in the right direction. Green Demand

Make no mistake, consumer needs and desires can be just as powerful as those of business in determining the direction of the open market. Thanks to prominent media coverage and the rise in green marketing (regardless of motivation), more people than ever are factoring environmental impact into their purchasing decisions. Unfortunately, being green is expensive, making a green lifestyle something of a luxury item. Buy a hybrid car; pay a premium. Buy a compact fluorescent light bulb; pay a premium (at least up front). Buy wind power; pay a premium. In times of economic prosperity, people can afford to pay more for discretionary features such as eco-friendly ingredients. With extra

dollars to spend during the early 2000s, many Americans felt free to fulfill their sense of growing moral obligation to the environment. In a February 2008 survey by DoubleClick Performics, 45 per cent of respondents said they would pay at least five per cent more for environmentally-friendly products. Today, as an increasing number of citizens are struggling to fill their tanks at the pump, the average family simply can’t afford to offset its carbon by paying for credits on an obscure website. A price-sensitive family has a much harder time buying green products if it is struggling to pay for groceries. Sadly, just as the energy crisis stimulates green thinking on the part of corporations, it can tighten green spending on the part of consumers. For most of the world’s population, price is – and will continue to be – the most important consideration when making a purchase. And for now, green products are still simply too expensive to be ubiquitous. Unless relative costs come down, green products will be nothing more than a fad with compelling media coverage. Even if green products become affordable, there are still other elements of demand that must be addressed. All too often, consumers fail to account for the long-term human benefit of green products – making it easier to spend that extra five dollars on something more immediately rewarding. Long-term environmental results are hard to communicate in a society with a short attention span and a need for instant gratification. Education will be the key. Perhaps more important, the ultimate threat to consumer demand for green products is perception of quality. Many green products are perceived to be (and in fact are) of worse quality than the regular alternative. In the end, consumers must understand the true value of green products and have access to goods that are both high-quality and cost-effective. Consider the compact fluorescent light bulb (CFL). While this technology has been around since the 1970s, the bulbs are only now seeing widespread acceptance. One of the primary Rotman Magazine Fall 2009 / 83

barriers to adoption has been the price premium; CFL bulbs sell for five to seven times the price of a standard bulb. Although longer life span and lower electricity usage make CFLs cheaper in the long run, consumers long failed to understand the overall financial impact beyond initial retail price. It has taken significant educational investments and good packaging design to finally convince consumers to make the switch. CFLs have also suffered from quality perceptions – harsh light and delays in activation time favoured incandescent bulbs. Only recently, as energy costs have skyrocketed and the quality of products has improved, have CFLs really taken off, so that 67 per cent of consumers now have CFLs in their homes. Even in industries where green products are booming, there is always the risk that consumers will revert back to cheaper, non-green products when price becomes an issue. The good news is that, for now, consumers are ready to keep the movement going. An April 2008 study showed that economic concerns have not diminished the demand for environmentally friendly products: more than 50 per cent of consumers said they’re still buying green products. Moving Forward

It’s time to realize that there is a flaw in our capitalistic system, but one that can be fixed by establishing sustainability as a key component of supply and demand. While a reduction of costs falls within the domain of industry, consumers must begin to generate stronger demand. Those who can afford the luxury of green products should be participating in the market to kickstart products on the verge of going mainstream. Meanwhile, as many people as possible need to be educated about the fiscal and environmental benefits of purchasing and using green products. It is the consumer who must change the demand equation so that businesses reap the benefits of their environmental investments, and thus continue to fund them. But it’s also up to companies to create green products that act as suitable, high-quality substitutes for the original. Clear information that integrates environmental cost factors into the purchase decision will also go a long way toward 84 / Rotman Magazine Fall 2009

solving the problem. Consumers need to be convinced of the impact of their decisions, beyond personal finance – and for this to happen, more information is needed at the point of sale. Some have suggested that carbon offset programs or designations such as Energy Star are the solution, but these programs perpetuate the idea that being eco-friendly is discretionary. Imagine if, instead, the cost of a carbon offset was included in all purchases; the eco-friendly choice would become drastically more appealing. Timberland, a manufacturer of shoes and apparel, has one of the more interesting solutions. The company prints a ‘nutrition’ label on every box of shoes so that consumers know how their decision to buy Timberland products affects the environment. It’s not quite the same as showing discrete costs, but it’s a step in the right direction. Government can also help guide green economics. Australia recently passed a bill to phase out all incandescent bulbs in favor of CFLs by 2010, and Canada has aimed to achieve the same goal by 2012. In Utah, state workers have moved to a four-day work week, which instantly reduced commuting costs for workers by 20 per cent and shaved significant amounts off of the state electricity bill. Tax credits, incentives, grants and other instruments can also help to bring down the relative price point of green products to make them more cost-effective. In Closing

Ultimately, mitigating human impact on the environment will take more than a simple switch from a Hummer to a Prius or from incandescent to CFL. Rather, it will require a radical shift in the behaviour, expectations and norms set out by consumers and corporations alike. Such a drastic change will take significant time and effort. As individuals, we can all help speed up the cycle. In the end, it is up to economics, but the economics are up to us.

David DeRemer is a senior strategist with frog design in New York City.

This article originally appeared in the Design Management Review, published by the Design Management Institute.

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Questions for: Russell Palmer

Q

&A The former Wharton School Dean and youngest-ever CEO of a ‘Big Eight’ firm talks about what is missing from the current leadership landscape. Interview by Karen Christensen

One of your 14 ‘basic principles of leadership’ is integrity, which seems to be in short supply these days. How can it be restored?

The foundation for leadership is integrity, so when it’s gone, we are in big trouble. One of the principal reasons this has happened is that people have said to themselves, “Well, that’s the way it is done,” or at least “That’s the way we do it here.” We have to change that. If our students are going into a culture that says, “the way to do things is to lie or cheat,” something is very wrong. They should be leaving our schools understanding what normal and ethical business practices are, so if they get into a tricky situation, they know how to react. The thing that breeds all of this bad behaviour is greed. Greed blinds people. They can always rationalize why something needs to be done. They might say, “Well, the other side didn’t play fair with us.” We have to make people understand that greed is a very cancerous thing for the economy, and that Rotman Magazine Fall 2009 / 85

Doing business in an appropriate way for the long-term will result in rewards that are much greater than what short-term greed and rationalizations can offer.

doing business in an appropriate way for the long-term will result in rewards that are much greater than what short-term greed and rationalizations can offer. As you have observed the turmoil of recent months, which of your basic principles of leadership have you seen shattered the most often?

Integrity has definitely taken the worst beating. It isn’t the first time we’ve had scams like the Bernie Madoff scheme; the thing is that the crisis has flushed these people out. It seems like the business world has gone over the cliff, but the truth is, the Madoff fraud was in the works for at least 30 years. This sort of thing has always been there. A second area that I would say has been shattered to some degree is good judgment. It’s so hard to believe that in these times, with people down in Washington asking for bailout money, some of them are still building themselves million-dollar offices or giving out huge bonuses. It’s so hard to understand how they can justify having these opulent offsite meetings or taking delivery on a new G5. Where is the judgment? How can people be doing these things in light of asking the taxpayers to bail them out? In your role as CEO of The Palmer Group – which invests in small and medium-sized businesses – what has been your greatest challenge over the past six months?

We are fortunate in that we own educational entities, so we have actually seen an increase in business.We really haven’t had too many challenges – although I don’t like to mention that when so many people are hurting. 86 / Rotman Magazine Fall 2009

Everybody seemed so surprised when the crisis hit. If T. Rowe Price could understand that the mortgage bubble and the securitization bubble was building and get out of those areas, why did so many others stay in? If certain private banking institutions wouldn’t touch a Madoff-style investment, why did so many do it? Even back in the dot-com days, when people said, “I don’t understand how this bubble can keep going when none of these companies have any earnings” – why did so many people stay in? Again, it comes down to greed and a short-term approach. If you’re in things for the long-term, you look at them differently than if you say, “I’m going to buy this today and get rid of it tomorrow.” I really believe that the signs were there, all over the map, and I don’t understand how so many people could be caught so short. The truth is that we all should have seen this coming long before the crash. You believe that times of crisis can make people and organizations better. Please explain.

A crisis is a time to accelerate change for the positive. Effecting change in a business is one of the most difficult things to do. If you take a look at the studies, the main thing that causes mergers to fail is that the two cultures come together and fight each other. Most people say that they love change – as long as it doesn’t affect them. So a crisis provides a sort of ‘burning platform’ for change. In good times, it’s more like you’ve got a brick wall that you need to knock down in an organization. If you’re wise, you will wait until one of the bricks is weathered and gets loose, and then you’ll push it over. It may not be the next brick you wanted to address, but you sort of take it as the opportunities arise. In a crisis situation,

Russell Palmer’s Basic Principles of Successful Leadership

1. A leader at all times must embody personal integrity, which is the foundation of leadership. Followers want to believe that their leader is unshakably fair in public and in private. 2. A leader applies basically the same principles of leadership regardless of context, but the style of execution is very different in different contexts. That is, execution in leadership is to a great extent about context. 3. In normal times, a leader should make faster progress taking opportunities that are ready for change rather than trying to take on areas that the leader knows will be more resisted. Later these resistance areas could be more conducive to change. 4. In times of crisis, a leader must step out ahead of the followers and make difficult decisions without consensus and at times even without adequate explanation in order to resolve threats to the organization. 5. A leader’s ultimate goal is to release the human potential of the followers. 6. Leaders need to foster innovation at all levels of the organization, and that means listening to workers and giving them ample latitude to experiment, make mistakes and seek new products and services for a constantly-changing competitive landscape. 7. A leader mobilizes followers by finding out their goals, desires, wants and needs, and makes them believe that the leader is truly trying to help them achieve these aspirations.

you can do so much more and ‘get away with it’, in effect. Anne Mulcahey found this out at Xerox and Larry Bossidy at Honeywell – that a difficult situation provides a great platform for change. Compensation systems have been under the microscope of late. If you could wave a magic wand, what new rule would you put into place?

I don’t think we need more rules as far as compensation goes, I just think we need people to do the right thing. Too often, we put rules into place to take care of some of these egregious situations, and it ends up harming the people that were doing things right in the first place. Let me explain. The best people should be paid very well. For instance, how much would you pay for somebody that could go in tomorrow and

8. A leader’s most important and essential attribute is good judgment. This is innate and really can’t be taught. 9. A leader must build confidence among the followers. Like teachers, a leader must communicate high expectations and then ensure that followers develop confidence that they can meet those expectations. ‘They can who think they can.’ 10. A leader must give considerable thought and careful execution to the whole area of rational and intangible rewards in relation to the motivation of followers. For example, it is critical to the execution of a strategic plan that the compensation system be tied to the plan and not exclusively to earnings per share or the budget. 11. A leader can’t get too far out in front of the troops in leading without risking failure to achieve the leader’s goals. A leader will always be ahead in thinking, but the group must be brought along so that members understand what is happening and why. 12. A leader must communicate his/her goals to the entire organization – ideally in person, but at least in writing in his or her own words. 13. A leader serves as a symbol and is perceived by followers to be on a different plane from the rest of the organization. He or she can only go so far in being ‘one of the boys’. 14. Leadership is the main differentiator in performance in most environments. From Ultimate Leadership by Russell Palmer (Wharton School Publishing, 2008).

fix General Motors? I’d pay them just about anything, and they would be worth it. The problem is that the mediocre think they should be paid like the best. They see all these charts published in BusinessWeek and they say, “Hey, my company’s as big as that one, why am I not being paid the same?” But the fact is, they shouldn’t be paid the same, because they’re not doing the same job. For a long time now, compensation consultants have been pegging salaries or recommending that they be at 75 per cent of the industry, which just drives compensation up and up. Ultimately it should be about the value that an executive adds to an organization. For the government to come in and say, “We think the head of General Motors should make $500,000” – you’re not going to get anybody to take on that job who would have the slightest chance of doing it. So it comes Rotman Magazine Fall 2009 / 87

I can guarantee that there was nobody on these Boards that even came close to understanding all those complex derivative contracts and hedging techniques.

down to the Board and the Compensation Committees, who have the responsibility and the obligation of taking a hard stand against CEOs that are only doing an average (or terrible job) and not paying them too highly, and handsomely rewarding those who do well. In some of the well-publicized situations that led to the crisis, people have asked, “Where were the directors?” What is your answer to this?

I can guarantee that there was nobody on those Boards that even came close to understanding all those complex derivative contracts and hedging techniques. You just can’t expect a director to come in and understand highly-sophisticated instruments that only two or three people in the company actually understand. You might say, “Well then, directors should have no responsibility in that area.” I would say no, that’s not true. If they get uncomfortable with what they see and feel the need to bring in experts to take a look at hedging strategies and so forth, they have a responsibility to do that. But they just can’t get into the day-to-day operations of the entity and they can’t know every single thing that could possibly go wrong. That’s what they rely on management to tell them, and in some cases, that’s why they bring in outside auditors or consultants. You have served on 12 prominent boards, including Honeywell and Goodyear. Is the corporate governance landscape in good shape?

I think it’s actually in better shape than most people think, but 88 / Rotman Magazine Fall 2009

it really depends on your answer to the question, “What are Boards supposed to do?” Are they supposed to micro-manage? Are they supposed to understand every single thing that happens in a company, no matter how sophisticated it is? In my view, directors are there to see that, number one, the company has strong leadership. They need to pick a strong leader and over time, determine how good they are. If they’re no good, the board has a responsibility to get rid of them and get someone else in.The board is also there to review and approve a strategic plan composed by management; they’re there to measure executives and the company against that strategic plan, to understand and be involved in any problems that come along and to determine to the degree possible that the company is being operated with integrity. You might say, “Gee, is that it?”; but in truth, this may be about all we can expect a board to do.

Russell Palmer is the author of Ultimate Leadership: Winning Execution Strategies for Your Situation (Wharton School Publishing, 2008) and chairman and CEO of The Palmer Group, a private investment firm that invests in small and medium-sized businesses. He served as Dean of the Wharton School of Business from 1983 to 1990. Earlier, he was named CEO of Touche Ross & Co. (now Deloitte & Touche) at age 37, making him the youngest person ever to attain this position in a ‘Big Eight’ firm. He has served on 12 NYSE boards, including Honeywell, Verizon Communications and The Goodyear Rubber and Tire Company.

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Faculty Focus: Nina Mazar

THE DISHONESTY OF HONEST PEOPLE: A THEORY OF SELF-CONCEPT MAINTENANCE

Even people who consider themselves ‘honest’ make use of various mechanisms to engage in limited amounts of dishonesty.

IT IS ALMOST IMPOSSIBLE to open a newspaper or turn on a TV these days without being exposed to a report of dishonest behaviour of one type or another. The business arena is particularly susceptible: the largest contribution to dishonesty comes from employee theft and fraud, which has been estimated at $600 billion per year in the U.S. alone – an amount almost twice the market capitalization of General Electric. Rooted in the philosophy of Thomas Hobbes, Adam Smith and the standard economic model of rational human behaviour is the belief that ‘people carry out dishonest acts consciously and deliberatively by trading off the expected external benefits and costs of the dishonest act’. According to this perspective, people would consider three factors as they pass a gas station: the expected amount of cash they stand to gain from robbing the place; the probability of being caught; and the magnitude of punishment if caught. On the basis of these

inputs, people reach decisions that maximize their interests. According to this perspective, people are honest or dishonest only to the extent that the planned trade-off favours a particular action. In addition to being central to economic theory, this view plays an important role in the theory of crime and punishment, which forms the basis for most policy measures aimed at preventing dishonesty and guides punishments. This standard external cost-benefit perspective generates three hypotheses as to the forces that increase the frequency and magnitude of dishonesty: 1. Higher magnitude of external rewards; 2. Lower probability of being caught; and 3. Lower magnitude of punishment. However, from a psychological perspective, a fourth set of important inputs emerges: internal rewards. Research shows that as part of socialization, people internalize the norms and Rotman Magazine Fall 2009 / 89

There is a ‘magnitude-range’ of dishonesty within which people can cheat, but their behaviour does not bear negatively on their self-concept.

values of their society, which serve as ‘internal benchmarks’ against which they compare their behaviour. Compliance with our internal value system provides positive rewards, whereas non-compliance leads to ‘punishment’. The most direct evidence regarding the existence of such internal-reward mechanisms comes from brain imaging studies revealing that acts based on social norms, such as altruistic punishment or social cooperation, activate the same primary reward centres in the brain that external benefits such as preferred food, drinks, and monetary gains do. Applied to the context of (dis)honesty, one major way in which the internal reward system exerts control over our behaviour is by influencing our self-concept. People typically value honesty – making it part of their internal reward system. They have very strong beliefs in their own morality, and want to maintain this aspect of their self-concept. As a result, if a person fails to comply with her internal standards for honesty, she will have to negatively update her self-concept; but if she complies with her internal standards, she avoids such negative updating and can maintain a positive self-view in terms of being ‘an honest person’. The Theory of Self-Concept Maintenance

People are often torn between two competing motivations: gaining from cheating versus maintaining their positive selfconcept as honest individuals. If they cheat, they could, for example, gain financially, but at the expense of an honest selfconcept. In contrast, if they take the high road, they might forgo financial benefits but maintain a positive self-concept. This seems to be a win-lose situation, in that choosing one path involves sacrificing the other. My colleagues and I suggest that people typically solve this dilemma by finding a balance between the two motivating forces, such that they derive some financial benefit from behaving dishonestly but still maintain their positive self-concept in terms of being honest individuals. We propose that 90 / Rotman Magazine Fall 2009

there is a ‘magnitude-range’ of dishonesty within which people can cheat, but their behaviour – which they would usually consider dishonest – does not bear negatively on their self-concept. Following are two routes to finding such a compromise: 1. Categorization

For certain types of actions and magnitudes of dishonesty, people can categorize their actions in more compatible terms and find rationalizations for them. As a consequence, they can cheat while avoiding any negative self-signals that might affect their self-concept. Two important aspects of categorization are its relative malleability and its limit. Behaviours with malleable categorization are ones that allow people to reinterpret them in a selfserving manner, and the degree of malleability is likely to be determined by their context. For example, intuition suggests that it is easier to steal a 10 cent pencil from a friend than to steal 10 cents out of this friend’s wallet to buy a pencil, because the former scenario offers more possibilities to categorize the action in terms that are compatible with friendship (i.e., ‘my friend took a pencil from me once; this is what friends do’). This thought experiment suggests that a higher degree of categorization malleability facilitates dishonesty (stealing), but also that some actions are inherently less malleable and therefore cannot be categorized in compatible terms. In other words, as categorization malleability increases, so does the magnitude of dishonesty that a person can commit without influencing his or her self-concept. A second important aspect of the categorization process pertains to its inherent limit. The ability to categorize behaviour in ways other than dishonest or immoral can be incredibly useful, but it is hard to imagine that this mechanism is without limits. Instead, we propose that it is possible to ‘stretch’ the truth and the bounds of mental representations only up to a certain point. If the categorization process has such built-in limits, we should conceptualize categorization as effective only up to a threshold, beyond which people can no longer avoid the obvious moral implications of their behaviour.

The question is not whether a person knows it is wrong to behave dishonestly, but whether he thinks of these standards and compares his behaviour to them in the moment of temptation.

2. Attention to Standards

This idea relates to Shelley Duval and Robert Wicklund’s Theory of Objective Self-Awareness and Ellen Langer’s concept of ‘mindlessness’. When people attend to their own moral standards (i.e., they are ‘mindful’ of them), any dishonest action is more likely to be reflected in their self-concept (i.e., they will update their self-concept as a consequence of their actions), which in turn will cause people to adhere to a stricter delineation of honest and dishonest behaviour. However, when individuals are inattentive to their own moral standards (i.e., they are ‘mindless’ of them) their actions are not evaluated relative to their standards, their self-concept is less likely to be updated and their behaviour is likely to diverge from their standards. Thus, in cases in which one’s moral standards are more accessible, people will have to confront the meaning of their actions more readily and will therefore be more honest. In this sense, greater attention to standards can be viewed as a tighter range for the magnitude of dishonest actions that does not trigger updating of the self-concept, or a lower threshold up to which people can be dishonest without influencing their self-concept. Whereas the categorization mechanism depends heavily on stimuli and actions (i.e., degree of malleability and magnitude of dishonesty), the attention to standards mechanism relies on internal awareness or salience. From this perspective, these two mechanisms are distinct: the former focuses on the outside world, the latter on the inside world. However, they are related in that both involve attention, are sensitive to manipulations and relate to the dynamics of acceptable behavioural boundaries. In sum, the Theory of Self-Concept Maintenance suggests the following: • Dishonesty will increase as attention to standards for honesty decreases. • Dishonesty will increase as categorization malleability increases.

• Given the opportunity to be dishonest, individuals will be dishonest up to a certain level that does not force them to update their self-concept. My research

I recently conducted research on this topic with Prof. Dan Ariely of Duke’s Fuqua School of Business and On Amir, assistant professor of Marketing at UC San Diego’s Rady School of Business. Our experiments involved a multiplequestion task in which participants were paid according to their performance. We compared the performance of respondents in the control conditions, in which they had no opportunity to be dishonest, with ‘cheating’ conditions, in which they were given such an opportunity. In Experiment 1, we tested our prediction that increasing people’s attention to their personal standards for honesty would make them more honest by contrasting the magnitude of dishonesty in a condition in which participants were reminded of their standards with a condition in which they were not. On the face of it, the idea that a reminder of one’s standards can decrease dishonesty seems strange – after all, don’t people know that it is wrong to be dishonest, even without such reminders? However, from the self-concept maintenance perspective, the question is not whether a person knows it is wrong to behave dishonestly, but whether he thinks of these standards and compares his behaviour to them in the moment of temptation. In other words, if a mere reminder of honesty standards has an effect, we may assert that people don’t naturally attend to those standards. We implemented this reminder through a simple recall task, and across six experiments, found support for our theory by demonstrating that when people had the ability to cheat, they cheated, but the per person magnitude of dishonesty was relatively low (relative to the possible maximum amount). We also found that people were generally insensitive to the expected external costs and benefits associated with the Rotman Magazine Fall 2009 / 91

dishonest acts, but they were very sensitive to contextual manipulations related to the self-concept. In particular, the level of dishonesty dropped when people paid more attention to honesty standards and climbed with increased categorization malleability. Some of our results provided direct evidence for the selfconcept maintenance mechanism by showing that even though participants knew they were over-claiming, their actions did not affect their self-concept in terms of honesty. Across six experiments and 791 participants who had an opportunity to cheat, we encountered only five (0.6 per cent) who cheated at the maximal amount. A large majority cheated only slightly (and thus presumably engaged in a trade-off of external and internal rewards leading them to engage in limited dishonesty that flies under the self-concept radar). Furthermore, the total costs we incurred due to the limited dishonesty were much greater than those associated with the maximal dishonesty. Taken at face value, these results suggest that the efforts that society applies to deterring dishonesty – especially standard rational dishonesty – might be misplaced. Implications of Findings

These findings raise the possibility of a step-function-like relationship: a constant, limited amount of dishonesty up to a certain level of positive external rewards. Increasing the external rewards beyond that level could limit categorization malleability, leaving no room for ‘under-the-radar’ dishonesty. In this way, dishonesty may actually decrease as external rewards increase. At some point, however, when external rewards become very high, they should tempt the person sufficiently to prevail (because the external reward of being dishonest is much larger than the internal reward of maintaining a positive self-concept). From that point on, we predict that behaviour will be largely influenced by external rewards, as the standard economic perspective would predict. One question about under-the-radar dishonesty pertains to its magnitude in the modern economy. By its very nature, the level of dishonesty in the marketplace is difficult to measure, but if we take our studies as an indication, it may far exceed the magnitude of dishonesty committed by standard run-ofthe-mill criminals, who only consider the external rewards in their decision. 92 / Rotman Magazine Fall 2009

As we move away from cash exchanges and electronic transactions become more prevalent, ‘mediums’ are rapidly more available in the economy. Again, if we take our results at face value, we should pay particular attention to dishonesty in these new mediums, because they provide yet more opportunities for under-the-radar dishonesty. The next question relates to approaches for curbing underthe-radar dishonesty. Our findings suggest that increasing people’s attention to their own standards for honesty and decreasing the categorization malleability could be effective remedies. However, the means by which to incorporate such manipulations into everyday scenarios (e.g., returning used clothes, lying on tax returns or making false insurance claims) remain interesting and open questions. In Closing

While people almost universally value honesty and maintain high beliefs about their own morality, examples of dishonesty are rampant. The standard cost-benefit model, which is central to legal theory surrounding crime and punishment, assumes that such actions are performed by purely selfish, calculating people who care only about external rewards. In contrast, the psychological perspective proposed here assumes that people also care about internal rewards that help them maintain a positive self concept. The Theory of Self-Concept Maintenance shows that people who think highly of themselves in terms of honesty make use of various mechanisms that allow them to engage in limited amounts of dishonesty while retaining their positive views of themselves. In other words, there is a category of ‘acceptable dishonesty’ that is limited by internal reward considerations. As we have witnessed of late, such dishonesty is pushed to its limits on a regular basis.

Nina Mazar is an assistant professor of Marketing at the Rotman School of Management. This is an excerpt from a paper she wrote with Dan Ariely, the James B. Duke Professor of Behavioral Economics at Duke University’s Fuqua School of Business and the author of Predictably Irrational: The Hidden Forces That Shape Our Decisions (HarperCollins, 2008), and On Amir, assistant professor of Marketing at UC San Diego’s Rady School of Business. The complete paper, published in the Journal of Marketing Research, can be downloaded at http://papers.ssrn.com

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Faculty Focus: Ole-Kristian Hope

HOW USEFUL ARE STOCK RECOMMENDATIONS ? Interview by Stephen Watt We’re hearing a lot these days about stock market analysts and the accuracy of their recommendations. What factors come into play when it comes to picking stocks?

This issue was big during the tech bubble at the beginning of this decade, and it has resurfaced again with the latest economic downturn. During the tech bubble, analysts had strong ‘buy’ recommendations on companies that quickly proved to be unprofitable. Their failure to exercise good judgement led to a raft of new regulation being applied to the industry, both in the U.S. and internationally. Two of my recent papers, coauthored with Ran Barniv (Kent State), Mark Myring (Ball State) and Wayne Thomas (Oklahoma) analyze how analysts go about making recommendations, how these recommendations map onto future stock returns, how regulations affect the way analysts work, and how these elements vary across countries. The larger question is, are stock recommendations useful to investors? In a perfect world, you would expect an analyst to examine a company using firm-specific, industry-specific and macrolevel data, and then come up with an estimated value for that company, based on a model that takes into account future earnings or cash flows. If the company’s estimated value is greater than today’s stock price, the analyst would issue a buy recommendation, and conversely, if it is below that day’s stock price,

he would issue a sell recommendation. It seems obvious that there should be a positive relation between stock recommendations and analysts’ intrinsic value estimates based on their forecasts of future earnings, but that is not what we observed. We find that stock recommendations and valuation estimates are not related in the way you would expect. Instead, recommendations relate positively to ‘heuristics’, that is, the price-to-earnings-to-growth (PEG) ratio and long-term growth rates. Our findings suggest that analysts give the highest recommendations to growth stocks, and among growth stocks, they give the highest recommendations to firms for which the value of growth estimated by the PEG model exceeds the current stock price. What are analysts basing their recommendations on, if not a company’s earnings?

Clearly, if analysts didn’t provide any useful information whatsoever, they wouldn’t be in business. But they also have other incentives, such as the need to gain investment banking business, or to curry favour with management. Pragmatic considerations come into play. During a conference-call session, if you are providing forecast recommendations that management doesn’t like, you are not likely to be able to ask a question of the company. You will gain greater access if your stated views are positive than if they are negative. Such pragmatic considerations play more of a role in stock picking than you might expect. Rotman Magazine Fall 2009 / 93

Your research actually uncovered a negative relation between analysts’ recommendations and stock returns. Please discuss this remarkable finding.

Firstly, it is rather surprising that analysts give more favourable recommendations to stocks with lower valuation estimates (based on residual income models) relative to current price. The valuation estimates, developed using analysts’ earnings forecasts, relate positively to future excess stock returns. In other words, earnings forecasts are useful inputs into valuation models, yet they tend to relate negatively or insignificantly to stock recommendations. Why do analysts appear to avoid using valuable earnings forecasts in a sophisticated manner in setting their recommendations? This surprising result motivated us to examine the issue further, both in a single-country setting (the U.S.) and a multi-country setting. In our first study, we examined the effects of recent regulations in the U.S. market and found that analysts’ recommendations have in fact become more closely related to their valuation estimates since the regulations came into force. However, stock recommendations continue to relate negatively with future returns, even in the post-regulation period. We concluded that the regulations have affected analysts’ output – forecasted earnings and stock recommendations – but that investors should be aware that factors other than identifying mispriced stocks continue to influence analysts’ recommendations. Our second paper was the first to examine the relationship between recommendations, earnings forecasts and future excess returns in an international context. In it, we showed that in international markets in which analysts’ ‘other incentives’ are less pronounced than in the U.S., their stock recommendations are more closely aligned with valuation estimates, less closely aligned with ‘heuristics’, and positively associated with future returns. Overall, our findings are consistent with the idea that analysts are affected by incentives other than maximizing returns to investors. Furthermore, regulations can have an effect, but we shouldn’t expect them to completely solve the problem. Is effective regulation of the stock market possible?

The problem with regulations in general is that they often go overboard. We see this not just in stock analysis but in financial reporting and other areas where regulations have been applied. You want financial analysts to have some freedom, and to not be overly constrained by rules that stifle innovation. It is diffi94 / Rotman Magazine Fall 2009

cult to measure the true effects of regulations and to ascertain whether they are doing more harm than good. Based on our research, however, it is clear that the regulations applied after the tech bubble collapsed did have some positive effects. The analyst industry was so distorted that something had to be done, and the solution did not seem to be coming from within. The profession itself could have made an effort to self regulate, but it missed that opportunity, creating a need for multiple regulators to step in and protect investors. Once the regulations were put into place, the quality of stock picks improved. How can investors filter what they are hearing from analysts in order to gain a more accurate picture?

Investors should first be aware of the distribution of stock recommendations. In a perfect world, you would expect that half of recommendations would be to buy and half to sell, yet most stock recommendations are buy recommendations. This means that statistically, many of these recommendations will not lead to positive returns. You should also be aware of the relationship between an analyst’s brokerage firm and the company in question. If you know that there is a strong relationship between the two – for example, that the analyst’s firm underwrites the securities of the company in question – you should probably take his recommendations with a grain of salt. Investors should also avoid relying on a single analyst. By casting their net widely and looking at the distribution of recommendations of a particular stock, they can get a better sense of where a stock is heading. Clearly this takes time, but the more time you are willing to invest, the more you can learn. I advise using the information provided by your analyst in conjunction with other available information. It may seem paradoxical to have to do your own research, since the very point of an analyst is to do that for you and provide a summary of the results, captured in a buy-or-sell recommendation; but as we have seen, it pays to be well informed. There has been a groundswell of dissatisfaction with analysts in the wake of the current economic downturn. How fair is this reaction?

The financial crisis came as a shock to most people, and it might not be fair to place the blame on analysts. Almost everyone – central bankers, ministers of finance and the world’s money managers – was caught off guard. Predicting a crisis of this scale is probably more than you can expect from any individual. What we are seeing now might be a kind of healthy

correction to the tendency to place too much faith in analysts and their recommendations. Investors should always be wary of too much ‘cheerleading’: there needs to be a balance of faith and caution. In my teaching, I use the analogy of a marriage or relationship: when you are getting involved with someone, you want to be a little cautious, but not to the point where you cannot make up your mind. The same logic applies whether you are choosing a stock or choosing a mate: if you are too sceptical, you will never fall in love or make an investment; but if you are not sceptical enough, you will have reason to regret it later. You have also studied a new trend whereby firms from developing countries are acquiring well-known firms in developed countries. What are some of your findings?

In the past few years we have seen a number of high-profile acquisitions of the sort you describe. In most cases, these transactions were accompanied by heated nationalistic fervour in the developing country where the bidding company originated, and by plenty of media discussion about how the acquisition was good for the nation as a whole. This is not what we are used to seeing in big mergers and acquisitions that take place within the limits of the developed world, where the discussion is instead about shareholders and how they will benefit or fail to benefit from the transaction. Clearly, many factors explain why one firm acquires another: there must be synergies, growth opportunities, increased profitability and so on. But based on our research, national pride is another potent reason for one firm to acquire another. In my study, coauthored with Wayne Thomas and Dushyant Vyas [a Rotman PhD student], using a sample of 3,806 cross-border acquisitions, we documented that firms from developing countries pay more to acquire assets in developed countries than do firms from developed countries. Interestingly, within the sample of developing-country bidders, we found that national pride had both statistically and economically-important effects on the purchase premium. In other words, national pride does not merely register as a blip in the statistical data, it has powerful economic consequences. We examined a sample of 295 acquisitions from developing country firms, and of those, we classified 36 as ‘national pride acquisitions’. Quite simply, companies from developing countries pay more for their acquisitions, so there is a financial premium to be paid when national pride is involved. An interesting question is where this premium originates, because national pride may be exhibited both on both the buyer’s and the seller’s side. In the developed world, such pride may take the form of defensiveness or protectionism. In the U.S., for example, we have seen a concern that the takeover of port facilities by foreign firms might create a national security risk, or that acquisitions involving computers and technology, such as the purchase of IBM’s personal computer division by China’s Lenovo, might threaten intellectual property. That said, from the evidence

based on media articles surrounding the deals, national pride seems to be a more powerful factor on the buyer’s side: a firm from a developing country is willing to pay more for its acquisition because it has more at stake, including the pride of the nation as a whole. Why does national pride – a non-economic factor – play a decisive role in such important economic transactions?

While the existence of national pride considerations could be interpreted as ‘irrationality’ on the part of bidding firms, we cannot rule out the existence of alternate underlying rational motives. For example, it is possible that home governments could reward the firms with economic incentives like tax benefits, license granting, easier access to financing, reduced red tape, and so on. We examined a large number of alternative explanations for the national pride premium, and were careful to weed out most of them. For example, we were able to test for the effect of political connections, in situations where a government minister sits on the board of directors of a bidding company. Even when the effect of these connections is removed, national pride remains a powerful force. There may be an element of pure Psychology at work here. Certainly this would not be the first place where non-economic factors play a role in business decisions, as my colleagues who study the Psychology of the stock market can attest. Managers may be motivated by hubris, or by a strong sense of their personal or national identity. Business leaders have a natural propensity to want to build empires, and this impulse might be even more powerful when they happen to be from a developing country. National pride can magnify individual pride, and culture and history also play a role. For example, a company from India – a nation that has a history of being ruled by the British Raj – may gain a special satisfaction from taking over a wellknown UK company such as Jaguar. Furthermore, firms from developing countries may find it easier to indulge in empire building. Because constraints such as corporate governance mechanisms and shareholder activism are not as strong in these countries, CEOs have a freer hand to accomplish their ambitions. In a developing country such as India, for example, a single, powerful company can have more impact on the welfare of the nation as a whole than it would if it were in a more complex economy like that of the United States. These countries are starting from a lower starting point, so they have more to gain by extending their reach.

Ole-Kristian Hope is the Deloitte Professor of Accounting at the Rotman

School of Management. “Do Analysts Practice What They Preach and Should Investors Listen? Effects of Recent Regulations” was published in The Accounting Review, 2009, Vol. 84 No. 4. “International Evidence on Analyst Stock Recommendations, Valuations, and Returns.” and “The Cost of Pride: Why Do Firms From Developing Countries Bid Higher?” were under review at press time. Rotman Magazine Fall 2009 / 95

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Faculty Focus: Dilip Soman

EARMARKING MONEY: PARTITIONS, GUILT AND THE DECISION TO SPEND With low rates of personal savings becoming endemic, ‘earmarking’ your funds can be a helpful money-management strategy.

THERE IS WIDESPREAD CONCERN about declining savings rates among consumers. Indeed, the problem defies boundaries, ranging from sophisticated western economies with a high prevalence of consumer credit to more traditional economies in rural areas of the developing world, where banking infrastructure is almost nonexistent. Record numbers of personal bankruptcies and delinquencies have been reported in North America, while observers have commented that the rural markets of India and China will only emerge as a force if these consumers learn how to manage their money. Washington University’s Amar Cheema and I recently set out to study one particular approach to personal money management: earmarking money. The term ‘earmarking’ is typically used to describe the labeling of funds for a specific use. However, it often describes a more specific practice, in which earmarked money is kept distinct from other funds, either through physical segregation or other forms of categorization, such as a separate bank account. For example, many households open separate bank accounts for their children’s education expenses or for home-repairs. When money is deposited into such accounts, the thinking goes, it becomes ‘sticky’ and stays there rather than being spent on other things. Earmarking thus represents a self-

96 / Rotman Magazine Fall 2009

imposed rule that is used to control spending, and following such a rule requires the exertion of willpower to control impulsive short-term behaviour in favor of longer-term benefits. Breaking such a self-imposed rule can be psychologically costly, leading to feelings of failure or a loss of faith in oneself. But is the possibility of such a negative effect a strong-enough deterrent to lead one to follow the self-imposed rule? In prior research conducted in 2007, Prof. Cheema and I found that taking a particular quantity of a resource – say, food or money – and physically partitioning it into smaller quantities changes the temporal pattern of consumption of that resource, leading to greater self control [see “The Effects of Partitioning on Consumption”, Rotman, Spring 2008]. We set out to build on these findings by studying the effects of partitioning an earmarked amount of money on the guilt associated with using that money for an unrelated expense. Given our previous findings, we expected to find that using partitioned money (i.e., money from two separate accounts) for expenses unrelated to the intended earmark would lead to a higher amount of guilt than using funds from one account. Consequently, the desire to avoid this guilt would lead to greater self-control when the earmarked money is partitioned into two accounts than when it is pooled in one account. Specifically, we expected that the act of spending ear-

We expected to find that using partitioned money for expenses unrelated to the intended earmark would lead to a higher amount of guilt than using funds from one account.

marked money on an unrelated expense – rather than the magnitude of the expense – is what would induce guilt. This expectation is consistent with the ‘hedonic editing’ practice of aggregating monetary losses – whereby one $20 loss hurts less than two separate losses of $10 each. We tested our hypotheses in a field setting featuring lowincome consumers at the ‘bottom of the pyramid’: labourors at an infrastructure-construction project in rural India. The chosen project had been ongoing for eight months and was expected to last for more than another year. Labourers received cash wages with a frequency ranging from once a day to once a week, and a workweek had six days. Such infrastructure projects usually spawn-off several small townships in the general vicinity. It is important to note that while these townships are full-fledged in other regards, they often lack services such as banks and post offices. Only about seven per cent of such Indian villages are served by banks. Of particular interest to our study, none of the townships included in this study were served by banks, and hence people in these townships were habituated to a cash economy. None of them even had any banking experience: they earned cash and they spent cash. Of our 146 participants, 20 had previously pawned possessions for cash and another eight were aware of the existence of moneylenders and pawn shops. While all participants could converse fluently in the local language and could understand simple written instructions, many could not read beyond a few lines of text. All participants could count, add and subtract with ease and bargain at the local markets. For the purpose of our study, we recruited households where the labourer was the sole wage earner, belonged to a specific trade, had two children aged between two and seven and lived with a spouse and two children in a township within walking distance of the project. Given that all participants were from the same profession, they all earned the same amount: 670 Rupees [CAD$15.50] per week, paid in cash on Saturday. We eliminated potential participants who had unusual additional financial burdens (e.g., covering household expenses for extended family elsewhere). Our interviews suggested that the frequent pay periods resulted in the participants living their lives ‘one week at a time’. They budgeted in very narrow temporal frames and

ended up making poor economic decisions. All participants reported that they would have liked to save more money so they could afford to feed, clothe and educate their children, but they had barely enough to make ends meet. A financial planner, accompanied by a social worker, visited each of the 146 families, helping participants identify better money-management strategies. The planner further told each household that one simple way of saving more money was to set a savings target. The current savings rate for this group was very low: in the six months prior to our experiment, the mean savings rate was 0.75%, with 90 per cent of participants saving less than or equal to two per cent. In the context of our study, the financial planner determined that saving Rs. 40 each week (a rate of six per cent) was achievable. In addition, we gave some participants a more ambitious savings target of 12 per cent. The planner gave each participant their target savings amount, and said that the social worker would help put aside this amount each week in sealed envelopes. Participants were free to open those envelopes if needed, but it was emphasized that, ideally, they should keep the envelopes closed. It was emphasized that if they had to open the envelope for non-discretionary expenses, they should try and draw only as much as they actually needed and put the rest back. The financial planner went over these details several times to ensure that the labourers and their spouses understood the advice and the specific method of earmarking the savings in envelopes. At the end of the meeting, he informed participants that he would visit the household on the Saturday on which cash wages were disbursed in order to earmark the savings amount and to record the household’s saving over the previous week. For each of the next 15 Saturdays, social workers visited the 146 households, put the prescribed (earmarked) amount in savings envelopes and sealed and dated the envelopes. The social workers also recorded whether the savings envelopes from the previous weeks were sealed or opened, along with the exact amount saved in the previous week. For about half the households, the earmarked savings were sealed in plain white envelopes, and for the remaining ones, the envelopes had photographs of the participants’ children pasted on them. This was expected to increase the guilt associated Rotman Magazine Fall 2009 / 97

Partitions were even more effective when the guilt associated with using the earmarked money was emphasized by placing pictures of people’s children on the envelope.

with using the savings for other expenses. We also manipulated partitioning across participants: for about half of them, the savings amount was sealed in one envelope, and for the other half, the amount was divided equally across two envelopes. Participants were assigned to one of these conditions based on geographic and social clusters, with the goal of trying to minimize the possibility that two households from different treatment conditions met and discussed their participation. Our Findings

We summed up each household’s total savings (in Rupees) over the 14 weeks and consistent with our hypothesis, savings were higher when the earmarked amount was partitioned into two envelopes. It appears that opening an envelope indicated a failure to follow a rule, which could lead to easier subsequent spending from the envelope consistent with the ‘what-thehell’ effect. We also wanted to explore the factors that affected the likelihood of participants opening an earmarked envelope (i.e., violating the savings rule) in any given week. The data revealed that households whose earmarked savings amounts were partitioned saved more than those whose earmarked savings were not partitioned. Furthermore, partitions were more effective when the guilt associated with using the earmarked money was emphasized by placing pictures of their children on the envelope. This intervention also decreased the likelihood that a household would open a savings envelope in a given week, especially among households who had lower savings targets. Households that were provided higher savings targets were quite likely to open a savings envelope (85 per cent) – possibly because the amount was too large to spare from everyday expenses. In this context, the intervention of placing pictures on the envelopes did not decrease the likelihood of an envelope being opened. Furthermore, households for whom the larger earmarked amount was not partitioned (i.e., it was in one envelope) saved less than those for whom this amount was partitioned across two envelopes. Households who had high (versus low) targets and who had the earmarked amount in one 98 / Rotman Magazine Fall 2009

envelope (versus partitioned across two envelopes) saved the least over the period of our study. In Closing

Prof. Cheema and I continue to work with others to develop budgeting tools to help low-income consumers such as those depicted in our study. Two Rotman MBA students from the Class of 2009, Kavitha Narasimhan and Fiona Tam, have designed the next generation of ‘sealed envelopes’: a product that we call the ‘budgeting box’. The box has a system of slots and compartments which allows workers to put aside spare money over the months that then collects in compartments where it is earmarked for specific uses. Early tests with this concept are encouraging, and a more refined version is being developed for testing in rural India. While researchers in the area of mental accounting have repeatedly stressed the general idea that labeling money changes the manner in which that money is spent, prior to our study, little had been done to study how the various phenomena documented could be harnessed to help people better manage their household finances. We have addressed this gap with our finding that using partitioned money (from two accounts) for expenses unrelated to those earmarked for leads to a higher amount of guilt than using money from one account, and the desire to avoid this guilt leads to greater self-control when the earmarked money is partitioned into two accounts than when it is pooled in one account. At a time where there is a significant need to increase consumer prudence and savings rates across nations, our findings provide two specific interventions – earmarking and partitioning – that can help to achieve this outcome. Dilip Soman is the Corus Chair in Communication Strategy and professor of Marketing at the Rotman School of Management. The preceeding is based on a paper he co-wrote with Amar Cheema, assistant professor of Marketing at the Olin School of Business at Washington University.

For a complete copy of the paper from this was excerpted, e-mail [email protected]

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Point of View Mollie Painter-Morland

LEADERSHIP IN COMPLEX ADAPTIVE SYSTEMS

TONE AT THE TOP! THE FISH ROTS AT THE HEAD!

Such popular maxims reflect the widely-held belief that the leaders of an organization are responsible for instigating and sustaining a corporate culture that encourages employees to behave ethically. Most corporate ethics initiatives therefore start with an effort to secure board and executive commitment to the proposed program. Once its captains are aware of the ethical risks their organization faces, the thinking goes, the corporate ship will retrieve its moral compass. The overhaul of an organizational culture is therefore largely seen as a top-down affair, with leadership setting the tone, implementing initiatives and leading by example. That high-level individuals play an important role in articulating priorities and shaping the sensibilities of employees is not to be disputed. However, if the role of such individuals is not to be denied, it is also not to be overestimated. In this article I will explore the idea that organizational cultures are shaped not only by those in positions of authority, but also by all who participate in them. From this perspective, accountability is less a question of leaders being held accountable for the actions and decisions of employees, and more a case of all members of an organization being accountable to one another.

Towards a Relational Concept of Leadership

Much of the research on ethical leadership is focused on the behaviour of individuals in positions of authority, addressing the normative question: what ought an ethical leader to do? Those who believe that the key to ethical leadership lies in the answer to such questions draw on various philosophical paradigms to develop a definitive normative model of ‘a leader’s duties and responsibilities.’ The work of Joanne Cuilla is emblematic of this ‘individualist model’ of ethical leadership. She suggests that leaders have to be both ethical and effective, drawing on the literature on servant leadership and transformative leadership to make this point. From within both of these paradigms, there is acknowledgment of the fact that the interaction between leaders and their followers is of paramount importance, but there is no attempt to go beyond an understanding of leadership as a capacity of individuals. Thomas Maak and Nicola Pless present an intriguing alternative to such individualist models, proposing a more relational understanding of leadership. They define responsible leadership as “the art of building and sustaining relationships with all relevant stakeholders.” Relational leaders are described as the weavers and facilitators of trusting stakeholdRotman Magazine Fall 2009 / 99

‘Systemic leadership’ differs from traditional ‘great man’ theories in that it does not perceive the leadership function as something that is restricted to those in positions of authority.

er relations. They are said to be capable of balancing the power dynamics that are always at work in such relations by aligning the different values of the various parties in a way that serves everyone’s interests. Maak and Pless see ethical leaders as servants, stewards, coaches, architects, storytellers and change agents. This kind of leadership can only develop where there is a real concern for sustaining relationships, protecting and nurturing others and advancing shared goals. Modern organizations are ‘complex adaptive systems’ in that they are open, dynamic and continually responding to new developments. Though order still emerges from within them, they cannot be reduced to the sum of their components, because parts within the whole connect in multiple ways, with components interacting both serially and in parallel. These systems are non-linear and operate far from equilibrium, and are not at all structured as orderly, rule-governed grids. In the context of organizations operating as complex adaptive systems, a new perspective on leadership is therefore required that stands in sharp contrast to many popular leadership models. Conventional hierarchical command-and-control models prove inadequate within the unpredictable and dynamic environment of a complex adaptive organizational system. The kind of priorities and goals that are formulated in boardrooms by individuals at the top of the hierarchy and passed down ‘from on high’ cannot provide the members of a complex adaptive organizational system with an adequate or meaningful form of orientation. Modern corporate contexts are shaped instead by goals and priorities that emerge from within the organizational system and are thus recognized by all who participate in it. If leadership has traditionally been associated with the ability to influence and inform the beliefs and activities of those who participate in an organizational system, then it should be re-conceived as ‘a property of the system as a whole’. In order to develop a more sophisticated understanding of the leadership dynamics in such systems, it is helpful to distinguish between leaders, i.e., those appointed in positions of authority, and leadership as a broader construct. 100 / Rotman Magazine Fall 2009

‘Systemic leadership’ differs from traditional ‘great man’ theories in that it does not perceive leadership functions as something that are restricted to those appointed to positions of authority; rather, an organization’s direction is influenced by all who participate in it. Because individuals are continually interacting with one another and the world in a complex network of reciprocal relationships, values are created relationally. From this perspective, the circulation of influence within an organization is not unidirectional or hierarchically centered on one or more pivotal positions of authority. Instead it involves an ongoing direction-finding process, which is continually emergent and which draws in, and on, all the members of an organizational system, influencing the sense of moral orientation that emerges. Values have been defined as “enduring beliefs about preferable states of existence.” They express and articulate those things we care about and that we think create a better world. As expressions of the relationships that exist within a complex network, values are relational through and through: individuals actively contribute to the organizational culture that shapes and informs their sense of moral propriety, and the interactions between moral agents continually contribute to the moral fabric of the broader network. Values do not represent foundational truths, nor do they refer to an objective social reality that exists independently from a particular network of relations. Instead, normative guidelines emerge from the network of relationships within a complex adaptive system. They constitute those aspects which individuals within the organization and the organization as a whole care about, and as such they may truly be thought and spoken of as the values of the organization and the individuals within it. Adopting a more systemic perspective of leadership entails embracing the following six elements of it. 1. Eliciting and Appreciating Contention

Leadership in complex adaptive systems is quite different from unilaterally ‘directing’ the behaviours of others. Instead, it demands ‘enabling’ leadership, which entails disrupting

There is a close correlation between systemic leaders’ ability to draw out the best that various team members have to offer and their organization’s capacity to productively harness diversity.

existing patterns, encouraging novelty, and then making sense of whatever unfolds. Leaders in complex adaptive systems enable new perspectives by utilizing conflict and embracing uncertainty. By injecting tension judiciously, spaces may open up as a result of struggles over diverse ideas. Stanford’s Jerry Porras and his colleagues have argued for the ‘harvesting of contention’, pointing to the many advantages of accommodating dissent within an organization. Successful firms, they argue, are spaces within which contention and challenges to the status quo are not only welcomed, but also made productive. Porras points to Commerce Bank’s practice of challenging employees to regularly come up with at least one ‘stupid rule to kill,’ and iVillage’s open strategic meetings, where the best idea prevails.

more likely that agents will have to act in the absence of complete information. In these situations, individuals or groups would like to be able to expect that the word, promise, or written intentions of another individual or group can be relied upon. The internal processes that continually shape and form the life of an organization have an important bearing on members’ capacity for trust. A low-trust environment can lead to two common forms of avoidance: the displacement of responsibility and the diversion of attention. According to MIT’s Peter Senge, scapegoating, blaming problems on authority, externalizing the enemy, and shooting the messenger are all examples of how responsibility may be displaced by employees in the absence of trust. 4. Developing Wisdom and Humility

2. Fostering Collaboration

In a very real sense, the decision making pool in modern organizations has expanded, and leaders have to manage by inclusion, bringing as many people to the table as is necessary to gain a proper understanding of the challenges and opportunities that present themselves. An example of an emerging leadership strategy that involves collaboration is the notion of ‘virtuous teaching cycles’(VTC). VTC stands in stark contrast to traditional top-down strategies for knowledge dissemination. Since some of the knowledge that is most important for the sustained success of an organization is generated at the customer interface, a top-down knowledge dissemination strategy increases the likelihood that important insights will be obliterated before its value has been harvested. VTCs create highly-interactive learning opportunities, where the teacher can become the learner, and the learner the teacher. Companies like Best Buy and Intuit have had great success with this approach, empowering their frontline managers to become teachers and, by implication, leaders within their organizations. 3. Building Relationships of Trust

The complexity of contemporary business life makes it ever

Karl Weick has defined wisdom as “the balance between knowing and doubting, or behaviourally, as the balance between too much confidence and too much caution.” Wisdom enables individuals to simultaneously draw on what they know and embrace that which they might not know as opportunities for creative sense-making. Successful organizational learning and knowledge creation is based on what Weick calls ‘heedful interrelating’ and ‘acting thinkingly.’ It is this kind of openness and readiness to exploit whatever opportunities present themselves that facilitates the capacity for ongoing adaptation within an organization. 5. Celebrating Diversity

Diversity management is a special kind of skill that is characterized by the ability to sense what role differences and similarities in areas such as personal style, thought processes, and personality play in shaping the behavioural patterns within an organizational system. It is important to distinguish between the issue of representation, which relates to the presence of a variety of races and genders in the workplace, and the issue of diversity, which is associated with the differences, similarities, and tensions that can and do exist between the elements of Rotman Magazine Fall 2009 / 101

different mixtures of people. Mergers and acquisitions, changing customer bases, geographic relocations, product innovations, and the development of new functions have a complicating effect on relational dynamics, and there is a close correlation between systemic leaders’ ability to draw out the best that various members of their team have to offer and their organization’s capacity to productively harness diversity. The rich and challenging diversity of opinion within organizations mirrors the diversity in society at large. Organizations that allow their priorities and activities to be shaped and informed by the full spectrum of individual human differences within their ranks are much more likely to establish and sustain meaningful relationships with external stakeholders. 6. Embracing Interdependence

The growing appreciation for the extent to which an organization’s fate and fortunes are intertwined with that of its environment has underscored, for many, the importance of serving a broad stakeholder community. On various levels, organizations are discovering that they can no longer ‘go it alone’. An awareness of the interdependency between business and the systems within which it functions requires a special kind of capacity, which Senge calls ‘systems intelligence’ – the ability to see systems and patterns of interdependency within, and surrounding, an organization. Since normative expectations emerge within the context of a particular internal system of organizational relationships, there is always the risk that employees will become insulated against those interests that do not fall within their own immediate concerns. The phenomenon of ‘groupthink’ is a specific manifestation of such an insular mindset. What safeguards against the potentially harmful effects of such insularity is the fact that complex adaptive systems are organized as open networks of relations. As such, they simply cannot function in isolation from one another, and are unlikely to devolve into deterministic environments that undermine the possibility of dissent and criticism. In closing

The notion of systemic leadership reflects an awareness that 102 / Rotman Magazine Fall 2009

many of the functions that have traditionally been associated exclusively with formal leadership are now shared by all members of an organization. By participating in the creation of an organization’s moral fabric, individual employees are, in a very real sense, writing their own history, creating their own professional world, and continuing to fashion the conditions that will inform the future of everyone involved in the enterprise. The tacit sense of moral propriety that informs the behaviour of individual employees does not develop overnight, but gradually over time, and it is never entirely reified. As such, an organization’s agents always have an opportunity to contribute to the process of value formation that plays out daily among them. While it may not be possible to deliberately impose a set of pre-formulated values on employees, everyday decisions and actions, as well as the way in which an organization is structured, can have a decisive influence on what is valued by those who participate in the system. The notion of systemic leadership does not allow the members of an organization to ‘pass the buck’: it is everybody’s duty to continually take responsibility for the proper and efficient conduct of business. Maintaining trust and organizational purpose, while respecting differences, form the creative tensions that must be maintained within organizations. These tensions continually challenge organizational members to reevaluate how the organization and its agents interpret the moral challenges that confront them, and to take accountability for the emergence of a certain corporate ethos.

Mollie Painter-Morland is an associate professor of Philosophy and associ-

ate director of the Institute for Business and Professional Ethics at DePaul University in Chicago. The preceeding is based on her paper, “Systemic Leadership and the Emergence of Ethical Responsiveness,” which was recently published in the Journal of Business Ethics. She is the author of two books: Business Ethics as Practice: Ethics as the Everyday Business of Business (Cambridge University Press, 2008) and Cutting-Edge Issues in Business Ethics: Continental Challenges to Theory and Practice, co-edited with Patricia Werhane (Springer, 2008).

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Questions for: Thomas Donaldson

Q

&A The Wharton professor talks about the dangers of ‘undiscussables’ and why ordinary people sometimes do bad things. Interview by Karen Christensen

You once said, “I think I know what causes corporate ethical disasters, and it’s not what many people believe.” Please explain.

Lots of people think more compliance, training and rules will succeed in creating a more ethical environment, but decades of evidence suggests that is not the case. When I testified in the Senate during the Sarbanes-Oxley hearings, I had to remind senators that virtually all the corporations that fell from grace – the Enrons, WorldComs and Tycos – had sophisticated compliance programs and codes of ethics in place. In fact, Jeffrey Skilling was widely regarded as the man who beefed up compliance at Enron. Far more important in causing such problems are failures in the areas of leadership, corporate culture and systems – particularly reward systems. This is true of the current crisis. Banks and other financial institutions had abundant compliance, but failed at the fundamental tasks of avoiding systemic risk and rewarding in ways that encouraged excessive risk. Greed explains some of it, but behind every greed-driven leader are scores of other people – both inside and outside of the corporation – who know full well what is happening and are required to make it happen. You have pointed out the ‘ordinariness’ of many of the people involved in corporate scandals. What prompts ordinary people to do bad things?

Most of these people are neither saints nor sinners, yet they are the reason why once-triumphant corporations crumble. I have identified five ‘dangerous currents’ that leaders have to manage in order to prevent good people from doing bad things. The first is goal mesmerization. When executives are surveyed, they regularly identify ‘unreasonable targets and goals’ Rotman Magazine Fall 2009 / 103

as the most prominent pressure on their desire to behave ethically. Second is blind precedents. Almost noiselessly, unethical precedents can accumulate in an industry or company, until even well-intentioned people unknowingly engage in risky behaviour. Consider the slow-but- steady accumulation of bad precedents in the financial services industry. Third is uncommon stress. People often ruin their careers and impose high costs on their companies through actions taken while under extraordinary stress. Many high achievers regularly burden themselves with stress and sleeplessness without realizing how profoundly this can affect their judgment. Fourth is isolated teams or performers. Rising stars, for instance, are often given amazing discretion, and this can sink companies. Nicholas Leeson at Barings Bank is a prime example. The fifth dangerous current is a preponderance of discussion vacuums. When bad things can’t be talked about, even worse things will happen. And lastly, failure to anticipate challenges. Most companies have values statements in place, but too few ever ask the hard questions in advance about what those words might mean for future challenges. For example, What does ‘respect for the individual’ mean when we have to lay-off hundreds of people? Do executives or board members have any control over these dangerous currents?

They certainly do. One of the principal challenges for today’s leaders is managing these six elements to the extent of their ability, so that pretty-good people don’t end up doing tragic things. For boards, this means developing information conduits to and from the corporation that channel relevant ‘readings’ about the six dangerous currents. At a minimum, the board must secure independent and reliable information about leadership, culture and reward systems. What approach do you recommend for getting ‘undisscussables’ onto the table?

When I work with boards, I sometimes tell them that I can predict what a corporate Watergate – if they ever should suffer one – will look like, and one prediction is that the board members themselves will not know about it until it blows up. My second prediction is that there will be many people inside the corporation who not only knew about it, but who will have known about it for some time. This isn’t true of every corpo104 / Rotman Magazine Fall 2009

rate scandal, but it’s true of most, and this is a stark reminder of how corporations need to encourage a culture of speaking up. There are some strategies for doing this; it takes a lot more than simply announcing that ‘speaking up is encouraged’. I’ve known companies where the word goes out constantly, but still, no one dares to speak up because they know what will happen. A response pattern of not only not shooting the messenger, but actually rewarding the messenger sends a much louder signal. Often, what managers say when asked tough questions in public – how they respond, whether they are defensive and aggressive or encouraging and welcoming – sets the tone. Another helpful strategy is to increase the level of informal contact that senior leaders have with employees. Informal meeting opportunities such as lunches can do the trick. When I consulted to Kofi Annan and the other Assistant Secretary Generals at the United Nations in the wake of the oil-for-food scandal, the Attorneys General vowed that one of the changes they would make is to drop their bodyguards off before they entered the Vienna Café – the major lunch area inside the UN, where mid-level managers often congregate – and spend some time just getting to know people. Employees will be more willing to speak up if they have the personal confidence that comes from informal, not formal contact. Our Dean, Roger Martin, recently wrote in the Washington Post that anyone who accepted a bonus from AIG should have been fired if they refused to return it. What is your take on the situation?

The bonus situation is a symbol of a dangerous pattern of reward on Wall Street that, if not corrected, will only bring more disaster our way. Rewarding ‘short’ for performance while suffering ‘long’ is a disastrous strategy. It’s one we saw in the savings and loan crisis a couple of decades ago. This pattern of reward has come to have a special name: a Taleb Distribution. This is a system in which rewards are made on the basis of performance that, in any given year, is very likely to be strongly positive, but in unusual circumstances – say one in ten – is disastrous. So through leverage and ‘arranging the odds’, Wall Street employees are often able to receive large bonuses for a particular year’s performance, even as they are growing horrendous risk for the ‘unusual year’. When that unusual year comes along, the manager has already pocketed

Toxic people are like toxic gases: we’re never quite sure how to purge them.

considerable money and can be comfortable in the fact that ‘it’s not his money anyway’. The AIG bonus situation is complex, but I never found satisfactory the idea that these were merely ‘contractual arrangements’ that had to be honoured. Even when contractual arrangements exist, it’s pretty easy to tell an employee verbally, “if you turn down this bonus this year, you are very likely to have a job in years to come.” That’s a message that can be sent very clearly. You have said that the battle over CSR is overblown – that it is really about whether to endorse a ‘fat’ or ‘skinny’ interpretation of responsibility. Which interpretation would you argue for, and what does it entail?

Definitions of CSR range from broad or ‘fat’ ones that focus on large environmental and social problems such as AIDS, poverty, health and pollution to more specific or ‘skinny’ ones that focus on doing business with integrity and transparency. The common denominator is that corporate activity should be motivated in part by a concern for the welfare of some nonowners and by an underlying commitment to basic principles such as integrity, fairness and respect. The dispute over CSR is not a dispute over whether there should be social responsibility in business, but how much. Even Milton Friedman, who was notorious for his skinny interpretation, affirmed that corporations have ethical and social responsibilities. His point was simply that those responsibilities lie almost exclusively with fulfilling obligations to share owners. As such, Friedman offered a moral and not merely an economic interpretation of CSR, believing that in the end, society’s welfare is enhanced when corporations do what they do best – namely, make quality products at good prices in ways that benefit shareholders first but also, indirectly, society at large. Slightly less ‘anorexic’ interpretations of CSR affirm a primary commitment to share owners, but also add commitments under certain circumstances to other stakeholders such as customers, employees, the community and so on. I prefer these less-anorexic views, including for example ‘social contract’ interpretations, about which I have written. I believe that we are seeing an evolution of capitalism that redefines the function of the modern for-profit corporation in this manner, and that the current financial crisis is likely to increase the speed at

which this evolution occurs. I will be surprised if, in two decades time, what is taught in business schools isn’t markedly different and doesn’t assume responsibilities for corporations to stakeholders beyond stockholders. You have said that if companies don’t get executive pay under control, they face the threat of further ‘Draconian remedies’ like Sarbanes-Oxley. Please discuss.

Firms don’t have to wait for regulations – they can adopt smart measures on their own. For instance, by setting rules prohibiting compensation consultants from doing other business with the firm. Also, boards should get advice from more than one consultant, they should change their stable of consultants every five years; and they should set pay limits before searching for new executives, and be more skeptical of data showing pay levels at similar companies. Finally, boards should insist on contracts that make it easier to fire executives, and they should not include golden parachutes. I’m not even sure we should have severance packages – these are wealthy people we are talking about, after all. It has been noted that some of the key players from the Enron debacle stayed on and contributed to the current crisis. How can we rid the system of these ‘toxic’ individuals?

Toxic people are like toxic gases: we’re never quite sure how to purge them. The spectacle of the Freddie Krueger problem – i.e., ‘they’re back again’ – repeats itself in the history of business mistakes. John Meriwether was first involved in the Salomon debacle, only to go ahead to found Long Term Capital Management, which later almost brought the world’s economic system down. We have a high degree of patience with smart people, and we’re inclined in business and in other parts of life to forget that being smart and being ethical are separate qualities. I don’t have a great answer, but I think we need to be less dazzled by smarts and cleverness and more impressed by judgment and integrity.

Thomas Donaldson is the Mark O. Winkelman Professor of Legal Studies at

the Wharton School of Business and leads the School’s required MBA course on Responsibility in Business. He is a founding member and past-president of the Society for Business Ethics. Rotman Magazine Fall 2009 / 105

News Briefs FALL 2009

Integrative Thinking Moves Beyond Rotman INTEGRATIVE THINKING, the Rotman School’s trademark approach to finding creative solutions to complex problems, is moving beyond the walls of the University. This past May, 21 grade nine and ten students from Toronto’s Branksome Hall graduated from the I-Think Program, a pilot initiative that brings Integrative Thinking to high schools. The first youth leadership program of its kind, I-Think teaches students how leaders think, rather than what they do. Ellie Avishai (MBA ’07) and Robin Sacks, co-founders of Key Leadership Education, created the 13-week program to help students learn a set of thinking skills that will make them more sought-after when they enter the working world. “More than ever, success in today’s job market depends on the ability to think creatively, wade through ambiguous challenges, and solve complex problems,” says Avishal. “High school students who learn Integrative Thinking skills will enter their professional lives with nearly a decade of practice. By helping young people develop these skills early on, we hope to set them up for greater success.” Students in the program explored a range of cognitive tools including mental modeling, decision-making frameworks and creating productive systems of feedback. They also learned how integrating different points of view into problem-solving processes can lead to improved outcomes. “The I-Think curriculum challenges students to reflect on the set of beliefs and values that frame their own worldviews so that they are more open to different perspectives,” says Sacks. The program culminated with an opportunity to apply their skills outside the classroom by acting as consultants to the Stephen Leacock Foundation for Children – an organization dedicated to helping disadvantaged youth. “The energy with which these students have been willing to engage and explore their own learning processes is strik-

106 / Rotman Magazine Fall 2009

Dean Roger Martin (top centre) with Branksome Hall students.

ing,” says Dean Roger Martin, who spoke at the graduation. “People may someday look back on this program and say that the transformation of high school education began with these remarkable students.” Branksome Hall Principal Karen Murton commended the program, saying that “I-Think has inspired our students to be critical thinkers and risk takers with the power to change the world.” When asked what she had gained from the program, one student wrote: I-Think has taught me how remarkable it is to have the power to make our own choices. We can decide at this very moment to acknowledge that we, and no one else, are responsible for our lives.” Another wrote: “I was astounded at how you could go from what seemed to be two completely different options and merge them together to make one, more favourable option. From this experience I learned that it doesn’t have to be an ‘either-or’ decision.” Sacks and Avishai are now working with Branksome Hall to incorporate elements of the I-Think program into the school’s core curriculum, and will be rolling out the program to several other schools in the GTA in the coming year. – BY KEN MCGUFFIN

Rotman Provides Small-Business Training to Regent Park Community FOR THE FOURTH CONSECUTIVE YEAR, a unique program offered by the Rotman School has provided budding entrepreneurs in and around the Regent Park neighbourhood of Toronto with an opportunity to gain knowledge about starting a business. The Small Business Program is taught by Rotman faculty and other small business experts. Participants attend a series of lectures and workshops covering everything from business plan development to funding and financing options. “The program is ideal for people who are entrepreneurially focused and driven,” says Ann Armstrong, director of the Rotman Social Enterprise Initiative. “Over the years we have discovered that the Regent Park neighbourhood is filled with people with great business ideas who don’t know how to put those ideas into action.” In April, participants presented their business plans to a panel of experts. Unlike televised business plan competitions, participants receive immediate feedback on how to further develop their plans into reality. Past graduates of the program have gone on to establish businesses that include a yoga studio and a music school.

From left to right: Fidelis Ibiyimika, Jamillah Managhaya, Chalo Barrueta, Eliane Mazzawi and Jahnoi Beckford recently completed the Rotman Small Business Program.

One of the key features of the program is that it is completely pro bono: everyone involved, including the Rotman faculty, guest speakers and administrative staff are volunteers. This year, over 20 students and affiliates from the Rotman community contributed their time to assist with coaching. The program will launch a Web site this fall and will use it to further engage Rotman community support and to facilitate follow-up consulting with participants. For details, visit www.rotmanexecutive.com/corporatecitizenship/smallbusinessprogram. – BY PETER SCOTT

Chair Established in Honour of Dr. George Connell the George E. Connell Chair in Organizations and Society was announced at a dinner honouring Dr. George Connell, the University of Toronto’s twelfth president (1984-1990). University dignitaries, including current President David Naylor and Chancellor David Peterson, as well as key members of the Rotman community attended the event, including lead benefactors Joseph and Sandra Rotman. The Rotmans supported the creation of the Connell Chair, along with five other Chairs at the School. Known for his transformative role at the University during his tenure, Dr. Connell’s commitment to excellence in business education led to the Rotman School receiving its first dedicated facility and current home at 105 St. George Street. Dr. Connell is credited with playing pivotal role in setting the stage for the School’s significant growth in recent years as well as its current academic and research success. At the event, it was announced that Professor Joel Baum has been named the inaugural George E. Connell Chair holder. A noted expert in strategic management, Professor Baum is a pioneer in strategic organization – an interdisciplinary area of study he created. He is also the founding editor of the journal Strategic Organization. Since joining the

PHOTO: LISA SAKULENSKY

ON APRIL 27,

From left, Joseph and Sandra Rotman, George Connell and wife Sheila, and Dean Roger Martin.

Rotman School in 1997, Prof. Baum has served in various leadership roles including his current position as Associate Dean, Faculty with responsibilities that include faculty relations and recruiting. He is cross-appointed to the Department of Sociology. – BY RON LEVY Rotman Magazine Fall 2009 / 107

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News Briefs The Culture of Business: Doug Steiner WHEN HE WAS STILL IN HIS THIRTIES,

Doug Steiner, chairman and CEO of Perimeter Financial Corp. and columnist for The Globe and Mail’s Report on Business magazine, left a lucrative position with RBC Capital to start his own company. Now in his fifties, the self-described ‘serial entrepreneur’ has five business ventures and a lifetime of lessons under his belt. On March 31, he shared his wisdom on success, wealth and happiness in a presentation at the Rotman School titled, “The Culture of Business: Sales, Sociability, and Subjective Well-Being.” Steiner pointed out that the overarching career goal adopted by many MBAs – to achieve financial security in the shortest time possible – is not a sure path to happiness. He cited a research study from the UK that suggested the connection between happiness and net worth peaks with a net worth of $90,000: any amount higher than that can actually result in decreased personal happiness. “If you talk to people with $100 million, they’re not the most happy. In fact, they may be the most unhappy,” says Steiner, whose work as a journalist and entrepreneur has put him in contact with many high-net individuals. Money, the traditional measure of career success, has in recent years been replaced by more intangible standards of valuation, such as how people feel about their career and their place in society. “The happiest people in business are the ‘good business actors’,” says Steiner. “They believe in what they’re doing, know their place in the community, and

Professor of Integrative Thinking Appointed THE ACADEMIC DIRECTOR of the Desautels Centre for Integrative Thinking at the Rotman School of Management has been named the Marcel Desautels Professor of Integrative Thinking. Mihnea Moldoveanu, who joined the Rotman School in 1999, has been an associate professor of Strategic Management since July, 2005. Dr. Marcel Desautels is the president and CEO of the Canadian Credit Management Foundation. Well known for his support of Canadian post-secondary education, to date he has given an extraordinary $41 million to the Rotman School. His earlier donations founded the Desautels Centre and support student scholarships. “Mihnea is doing a remarkable job,” he says. “The

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are focused on increasing their knowledge every day.” Steiner used the term ‘subjective well-being’ to refer to the standard of success that should be the ultimate goal of each entrepreneur. “Subjective well-being does not come from wealth, though it does not preclude wealth. It comes from such intangibles as Doug Steiner self-acceptance, positive relations with others, autonomy, mastery over your environment, achieving a sense of purpose in life, and personal growth.” It takes tremendous courage to give up a lucrative position in order to chart a career path that is more personally fulfilling, as Steiner himself discovered when he left RBC. But it is not a decision he regrets. “Many people hate their lives because they’re stressed, time-deprived, sleep-deprived, or suffering from self-realization issues. Time is the only finite asset you’re dealing with; anything else, you can buy.” Recognizing that time, rather than money, is the supreme commodity allows those charting a career to pay closer attention to their social context. “Business is more than numbers and decision making. If you’re not well-liked, you won’t be successful,” says Steiner, who recommends volunteering and raising a family as effective ways to add value to the community. “Warren Buffett is a success because he’s predictable and smart, but also because he’s a nice person. Fairness wins, and by acting with honesty and integrity, you can shortcut your way to a good reputation.” – BY STEPHEN WATT

Professorship could not have gone to a more deserving person. Mihnea, along with Dean Roger Martin , has been key to the development of Integrative Thinking, which has become a fundamental part of how the Rotman School teaches and conducts research. Integrative Mihnea Moldoveanu Thinking’s success is such that other business schools are taking notice. Mihnea is a genius and I am extremely proud of his achievements,” says Dr. Desautels. The Desautels Centre has quickly gained an international reputation through its work on researching, understanding, and teaching new ways of thinking through complex, illdefined, multiply-defined or intractable business and social problems. It has developed methods and interventions for

Imagining India: Nandan Nilekani @Rotman VISITORS TO INFOSYS TECHNOLOGIES’ headquarters in Bangalore, India, are often struck by the contrast between the pristine streets of the company’s ‘campus’ and the ramshackle roads lying just beyond. The discrepancy, which points to the gap between India’s private sector growth and its lagging public infrastructure, helped inspire Nandan Nilekani, co-chairman and co-founder of Infosys, to write Imagining India: The Idea of a Nation Renewed (Penguin, 2009). On May 4, he visited the Rotman School to discuss his thoughts on India’s economic future with Dean Roger Martin, as part of the ongoing International Business Experts Speaker Series. India has undergone a remarkable economic transformation since 1991, when the government embarked on an ambitious program of fiscal reform: the economy has grown at an average rate of eight or nine per cent, compared to 3.5 per cent in the previous decades of socialism. One of the greatest symbols and beneficiaries of India’s new global presence is Infosys itself. Founded in 1981, it has become one of India’s largest information technology companies, with over 100,000 employees, offices in 22 countries and development centres in India, China, Australia, UK, Canada and Japan. But the technology boom is just part of the story of India’s economic miracle, says Nilekani. In Imagining India, he focuses on the role of the ‘demographic dividend’ in driving expansion. While the baby boom has slightly diminished in recent years, half the nation’s population is still ineligible to vote, making India a remarkably young country, even

thinking adaptively about such problems in real time and articulated the concept of the ‘Integrative Thinker’ as an idealized business problem solver who can function effectively across different domains of knowledge, affect and expertise. Integrative thinkers build models rather than choosing between them. These models take into account larger numbers of salient variables than their counter-parts, and can accommodate greater levels of logical and semantic complexity. Because they refuse to accept choices between pre-packaged options, integrative thinkers often manage to avoid the sub-optimal trade-offs that are the mainstay of conventional thinking. Integrative Thinking is a key part of the curriculum of the Rotman MBA and Executive MBA programs as well as many of the School’s Executive Education programs. Prof. Moldoveanu has been published in many leading business and psychology journals, and is the co-author of Master Passions: Emotion, Narrative, and the Development of Culture, published through MIT Press. His most recent

compared to China where the one-child policy has been enforced, albeit imperfectly, for decades. Asked by the Dean to compare the two economies from an investor’s point of view, Nilekani admitted some bias in favour of his home country. “Based on demographics alone, India’s economic growth will overtake China’s in the next decade, and will remain higher for another 30 years,” he stated. “If investment is about prospective return, go where the rate of growth is higher.” The new generation is quickly outgrowing a leadership that tends to be preoccupied by legacy issues. “The Indian people have become far more Nandan Nilekani dynamic, aspirational and global. Their hopes are for a better life, but the politicians are still steeped in the old arguments of caste, religion, region and language – concerns that divide people.” The challenge for India’s government is to encourage both growth and stability in the face of demographic upheaval. India’s infrastructure and educational system, both in poor shape compared to its rival China, are the two greatest areas of concern. “A demographic dividend is only as good as the investment you make in your human capital,” Nilekani says. “India has to create 10 million jobs a year just to keep its citizens occupied. Unless they are healthy and educated, have skills to work and a road to get to school or the office, India’s young people, for all their energy and aspirations, will fail to achieve their potential.”– BY STEPHEN WATT

book, The Future of the MBA: Designing the Thinker of the Future, co-authored with Dean Roger Martin, was published by Oxford University Press in 2008. His forthcoming book, also written with Roger Martin, will be out this fall (see back cover.) He holds a DBA from Harvard University, and MSc and BSc degrees in Mechanical Engineering from the Massachusetts Institute of Technology. In addition to his academic responsibilities, Prof. Moldoveanu has followed his management theories in the business world for the past 13 years. He is founder, pastCEO, and chief technological officer of Redline Communications, Inc., one of the world’s leading manufacturers of fourth-generation broadband wireless base stations for fixed and mobile applications and one of Canada’s fastest-growing companies during the past five years. Professor Moldoveanu was recognized as one of Canada’s Top 40 Under 40 in 2008. – BY KEN MCGUFFIN

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Rotman Experience Jason Chen (MBA ’09)

My Encounter with Warren Buffett

ful of patrons. In fact, store employees outnumber customers in most places. It’s one thing to read about weakening consumer demand in the news, but it’s something different altogether to see it with your own eyes. I wonder if Mr. Buffett will talk about the economy tomorrow. Omaha Prime Steakhouse – Nov. 20, 8:15 PM

Pearson International Airport – Nov. 20, 2008, 11:00 AM

In grade seven, my class had a school trip to Kearney, a campsite near Algonquin Park. For many of us, this was our first trip away from home by ourselves, and the mood on the bus was full of anticipation, excitement and anxiety. The main topic on the bus was what everyone would do when they got to Kearney: would there be campfires (yes), marshmallows (no), hikes (yes) and canoes (no)? As I sit in the boarding area waiting to board our first-leg flight to Chicago, the atmosphere makes me feel like a kid again. Some of my classmates had trouble sleeping the night before and are now drinking copious amounts of coffee to stay awake, while others are gathered around Professor Eric Kirzner to hear his stories from past trips to Omaha. The burning question on everyone’s mind is, “what am I going to ask Warren Buffett?” I personally want to ask him what motivates him to work so hard every day. After more than 50 years in the investment industry, it has to be more than money. In fact, by many accounts, Warren is not driven by material needs; he chauffeurs himself around in a Cadillac and still lives in the same house he bought in 1958. What is it that drives him?

The significance of this trip only dawns on me during dinner when we have journalists from Fox Business News interview our class for a Buffett special they are preparing. Fox plans to interview all six participating schools before tomorrow’s Q&A session to get a sense of the excitement and anticipation. During the interview, I stammer a hasty remark about how difficult it is to enroll in the Rotman School’s Value Investing class due to the opportunity to meet Buffett. Now I know what television personalities must feel like; will I look fat on TV? Should I have said something different? When the interviewer asks us what questions we are going to ask Warren, my classmate Scott nabs the question I had be preparing, only he is much more articulate and eloquent in expressing it. Now I have to come up with something else to ask. Random Buffett trivia – according to Professor Kirzner, the 20oz T-Bone steak is Warren Buffett’s favourite steak. Doubletree Hotel – Nov. 21, 4:00 AM

Eureka! I just came up with two brilliant questions to ask (at least they sound brilliant at four in the morning): 1. After more than 50 years in the investment industry, what is the single-most important piece of advice that you can give us? 2. You have obviously been very successful in your investment career. However, are there lessons from your past mistakes and failures that you can share with us, to make us better investors?

Flight to Omaha – Nov. 20, 4:00 PM

Berkshire Hathaway – Nov. 21, 9:15 AM

An interesting thought crosses my mind: if a pilot navigating the skies is analogous to a portfolio manager navigating the stock markets, shouldn’t there be a flight school for portfolio managers to make sure they can fly?

In our excitement upon arriving at Berkshire headquarters, many of us take a photo with the Kiewit logo in the building lobby, thinking it must have some connection with Berkshire Hathaway. Our sincere apologies to the Kiewit employees we held up in the elevator lobby. (As an aside, I also took pictures of the building across the street as we got off our bus; but I digress.)

Westroads Mall – Nov. 20, 6:00 PM

My classmates Tad, Monica, Leila and I decide to explore Omaha while we wait for dinner. After a 20 minute cab ride, we arrive at the largest mall in Omaha (according to the cab driver). The mall is anchored by Von Maur (Neiman Marcuslite?) and J.C. Penney, and there are a multitude of smaller stores like Abercrombie & Fitch and American Eagle. Let’s go shopping! Unfortunately, the shopping experience leaves much to be desired: every store we step into only has a hand110 / Rotman Magazine Fall 2009

Cloud Room – Nov. 21, 9:30 AM

Rotman is the first school to arrive and we proceed to take pictures of every aspect of the conference room. Some of us even take pictures of the boxes at the back of the room where we drop off our books for Warren’s signature. As ten o’clock comes and goes, I am a little nervous and anxious. Is that Warren’s

assistant going up to the podium to tell us that Warren is canceling the Q&A session because of the market volatility? (No, it was just someone from Fox testing the microphones.) One minute we are nervously chatting, and the next, Buffett appears at the front of the room like Houdini and launches into a two-and-a-half-hour marathon session of answering questions. The six schools ask a total of 28 (yes Berkeley, I noticed your first question was really two) questions and Warren proceeds to answer each and every one with an in-depth response. For those that have never heard him speak live, I would highly recommend searching on YouTube for some clips to put what I write into context. Warren is an amazingly articulate and funny speaker, with an innate ability to explain exceedingly-complex topics using simple everyday language (which, I believe, is a good sign of true understanding.) The topics range from the technical to the political, but for me, the most important takeaways are his personal and investment philosophies. For example, Warren firmly believes he is successful because he was born in the right place at the right time, with the right wiring. If he were born in another era, he would not be as successful (he might even end up as dinner for some wild animals!) In fact, he believes a lot of successful people do not appreciate what they have. He gave us the following anecdote to ponder: Consider life as an imaginary game where your attributes and skills are determined by a ticket. There’s a giant barrel with 6.5 billion tickets. If you could throw your ticket back into the barrel and choose another set of attributes and skills from a hundred randomly selected tickets, would you do it? Before you decide, consider some facts. Only five tickets would be for the United States. Of the five, only two would be of a particular sex (assuming you prefer one). Of the two, only one would have above-average intelligence, etc. Would you still throw your ticket back? Warren also had advice for graduate students. Instead of trying to find a job with a high salary, they should find something that they love to do, and they should consider working for an organization or an individual they respect. While I find it odd for an investment guru to impart philosophical advice, these words of wisdom were strangely refreshing and to the point. My favourite quote: Success is getting what you want. Happiness is wanting what you get. While this is not an original Buffett quote, it does put his entire philosophy and approach to life into context. I believe he is truly happy doing what he does, and he would be investing even if he wasn’t CEO of Berkshire.

Finally, what is a talk with Warren Buffet without some insight into his investment philosophies? Needless to say, this is what everyone came to Omaha for. In five simple steps, Warren’s investment process is: 1. Focus on your circle of competence (i.e., find industries or businesses you understand.) 2. Identify good companies in your circle of competence in terms of management, track record, etc. 3. Value the company by discounting the income stream from the business using an appropriate discount rate. 4. Compare the value with the market price; if the value is higher than the price by a margin of safety, invest. 5. Repeat step 1. While the above is an over-simplification, it does demonstrate two key tenets that Warren emphasized at the end of the session: Investing is not like Olympic gymnastics: you do not get rewarded for degree of difficulty. Know one or two things well, and if you hit hard when they come up occasionally, you will make money. Piccolo Pete’s – Nov. 21, 3:00 PM

Warren, what I meant to say when I gave you the certificate from Rotman was: As a gesture of our gratitude, the Rotman School of Management and Zerofootprint Solutions Inc. have purchased carbon offsets in your honour to offset the carbon emissions our trip from Toronto to Omaha produced.” Although I cannot recall exactly what I said, I am pretty sure it didn’t come out right. I will enroll myself in a Dale Carnegie public speaking course to improve my communication skills as soon as possible. Omaha Airport – Nov. 21, 5:00 PM

More than an hour after I shook hands with Warren Buffett at Piccolo Pete’s, I still cannot believe I just met one of the greatest individual investors in history. It has been a surreal experience, to say the least. In the end, the three questions I had for Warren were answered fully during the Q&A session. What motivates him is his love for investing. His advice for students is to find something we love doing. And finally, everyone makes mistakes, and it is ok to make mistakes as long as the process that led to the mistakes is correct. Words to live by! Jason Chen graduated in June and is now working as an Equity Research Associate with Cormark Securities, in Toronto.

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Alumni Capsules Compiled by Stephen Watt

Thomas Sears (MBA ’88) Chairman and CEO, Royal Bank of Canada Insurance Company Ltd. (Barbados) Lives and works in: Bridgetown, Barbados

The international nature of our business. Our clients and markets are global, requiring me to be on top of global markets, international business issues and emerging trends. There are no dull days. MY BIGGEST CHALLENGE: Making it all look effortless. When you work in the international arena, there are many moving parts, cultural differences and stakeholder needs. Everyone thinks they understand ‘your world’ but very few actually do. Meeting all of the business objectives is easy, but acting as the link between cultures, personalities and agendas can be a challenge. MOST IMPORTANT SKILL FOR MY JOB: Leadership. Managers might ‘do things right’ but leadership is about ‘doing the right thing.’ Deciding what to do and then getting people to follow you even if they don’t agree or initially understand is the most important skill in a global business. Some entrepreneurialism (or ‘intra-preneurialism’) also helps. Then it’s implementation, implementation, implementation. PROUDEST MOMENT: My marriage to Jessica and the birth of each of my four children cannot be touched for pride and emotion. In 1988, I was standing on stage at U of T’s Convocation Hall to receive my MBA after many years of parttime and full-time studies when Sarah, my then-five year old daughter yelled out, “Way to go, Daddy!” That was certainly the proudest moment in my career. I was able to return the compliment in 2006 when Sarah graduated in broadcast journalism before her career at CBC News. I am hoping she does that again for me when I complete my PhD studies in International Business in about two years time. THE WORD THAT BEST DESCRIBE ME: Energizer. As my wife and employees can attest, I just have to keep going like the Energizer bunny. And watch out: I like to bring people along with me. HOW I RELAX: Golf with my buddies; scuba diving with my other buddies; guitar and drums with my other, other, buddies; my PhD studies with my egg head friends; movies and travel with my wife; listening to and talking with my kids. WORDS OF WISDOM: Hard work makes for a lot of good luck. I HOLD MYSELF ACCOUNTABLE TO: my clients, my employees and

my shareholders. Life is never perfect or in equilibrium, but it’s my job to ensure we are balancing the needs of each of these three stakeholder groups using the values set out by our company as a guiding light in times of uncertainty.

BEST THING ABOUT MY JOB:

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Frank Melzer (MBA ’03) General Manager and CEO, Bosch Sensortec, a 100% subsidiary of Robert Bosch Lives in: Stuttgart, Germany Works in: Reutlingen, 30 min south of Stuttgart BEST THING ABOUT MY JOB: Having the once-in-a-lifetime chance to start a company from the ground up and to experience global growth. MY BIGGEST CHALLENGE: Excellence in this role requires the ability to anticipate the changes that the fast-growing consumer electronics industry imposes on us. Moreover, as a new entrant, one has to compete against larger and more established rivals on the market. Mastering these external variables and ensuring competitiveness whilst building up an organization literally from scratch constitutes the biggest challenge in my job. We are confronted with a new situation each day, which is why this is such a great job. MOST IMPORTANT SKILL(S) FOR MY JOB: The most challenging skill is to make fast (and good) decisions under the uncertainty of a new and fast-moving market. But making decisions is not enough. Our business environment requires continuous learning and reassessment. Hiring and retaining the right people for our venture is also tremendously important. PROUDEST MOMENT: My proudest moment in my professional career was being awarded the German Future Prize last December. My personal proudest moment was the birth of my son. THE WORD THAT BEST DESCRIBES ME: My colleagues would describe me as restless and focused on today’s challenges. HOW I RELAX: With my family. MOST IMPORTANT THING MY MBA TAUGHT ME: Business success can be achieved if you tackle the issues with the right team, with the appropriate tools and with willingness to seize opportunities and take risks. WORDS OF WISDOM: “It is only with the heart that one can see rightly; what is essential is invisible to the eye.” – Antoine de Saint-Exupéry.

Alyson Walker (MBA ’05) Account Executive, Digital Platforms, Canada's Olympic Broadcast Media Consortium (CTV/Rogers) Lives and works in: Toronto BEST THING ABOUT MY JOB:

Talking about

sports all day. MY BIGGEST CHALLENGE: Adapting

strategies to keep up with the pace of technological evolution.

MOST IMPORTANT SKILL FOR MY JOB:

Managing multiple stakeholder objectives. PROUDEST MOMENT:

Winning the Ultimate Frisbee World

Championships. THE WORD THAT BEST DESCRIBES ME: Adventurous.

that gets my heart rate up: a run, a ride, a hike, a sprint, hot yoga or a glass of red wine. MOST IMPORTANT THING MY MBA TAUGHT ME: It gave me the confidence to walk into any situation with the tools to provide value, formulate an approach and develop a solution to any problem. WORDS OF WISDOM: Life is short. Enjoy every minute. I HOLD MYSELF ACCOUNTABLE TO: All of the many people who have positively influenced my life: my parents, my friends, my employer, my school, my coaches, my teammates and most of all, myself.

Graduation day, when I received my MBA at Convocation Hall with my family in the audience. THE WORD THAT BEST DESCRIBES ME: Ambitious. HOW I RELAX: A nice glass of Shiraz with chocolates, candlelight and soft music. MOST IMPORTANT THING MY MBA TAUGHT ME: The belief that I can leave my comfort zone back home, fly thousands of miles away to start an intense student life in Canada with a heavy work load and tight deadlines, find success, get involved in the community, attend extracurricular workshops, and still enjoy it all. WORDS OF WISDOM: The minute you settle for less than you deserve, you get even less than you settled for. I HOLD MYSELF ACCOUNTABLE TO: Myself – to ensure that the investments I’ve made throughout my life pay off and that I realize my dreams, build a successful career path, achieve self-satisfaction, fulfill my priorities and most importantly, live a happy life. PROUDEST MOMENT:

HOW I RELAX: Anything

Banafsheh Kalantari (MBA ’08) Business Development Manager, Al Aqili Group Lives and works in: Dubai

Marnie Peters (MBA ’04) Marketing Director, Chatelaine Magazine, Rogers Consumer Publishing Lives and works in: Toronto

I love working in Chatelaine’s fast-paced and creative environment and the opportunity to have a meaningful impact on the lives of Canadian women. MY BIGGEST CHALLENGE: Coming up with the next big ideas and then executing BEST THING ABOUT MY JOB:

them quickly. MOST IMPORTANT SKILLS FOR MY JOB:

BEST THING ABOUT MY JOB: The adventure

of constantly travelling, seeing new countries, making new business contacts and meeting great people across a variety of industries. MY BIGGEST CHALLENGE: Time management. A significant amount of my time is spent out of office attending business events, meetings and seminars. I have to make a good use of time to complete an overwhelming list of tasks. MOST IMPORTANT SKILLS FOR MY JOB: To be a credible and compelling negotiator and possess excellent communication skills. To build and maintain solid relationships with prospects and guide them in handling their current suppliers.

Multi-tasking, creativity

and flexibility. Looking at my two beautiful children, Olivia and Alexander. THE WORD THAT BEST DESCRIBES ME: Practical (and very busy). HOW I RELAX: Reading, watching the highly addictive Gossip Girl, and enjoying a glass of wine with family and friends. MOST IMPORTANT THING MY MBA TAUGHT ME: The importance of considering and understanding situations from a variety of perspectives. I HOLD MYSELF ACCOUNTABLE TO: My husband and children to ensure we are creating a balanced and close-knit family life. In my professional life, to myself to make sure I’m always applying new skills and perspectives to my work, and to my managers, clients and readers to deliver them the best that Chatelaine has to offer. PROUDEST MOMENT:

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Alumni Dispatch Richard Wiltshire (MBA ’08)

Poverty Reduction Through Cluster Development are popular items in economic development circles. The concept of clusters was first introduced by Michael Porter and is defined as ‘geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region.’ One benefit of clustering firms is agglomeration economies: economies of scale that arise from firms locating close to one another, such as lower transportation costs for customers and suppliers. Another advantage is joint action benefits: firms actively working together to derive gain, such as regional shared marketing initiatives. Clusters are thought to be hubs for innovation, productivity, and economic growth. Successful clusters, like the information and communication technology cluster in Waterloo, Ontario, or the biotechnology cluster in Boston, Massachusetts, have demonstrated these things. Governments worldwide have taken note of the importance of clusters and often play an active role in promoting clusters through a variety of interventions. Clustering enterprises is also a widespread phenomenon in the developing world and can be a major contributor to economic output. India alone has some 2,000 identified clusters that contribute 60 per cent of the country’s manufactured exports. Clusters can also be closely connected to poverty. Many clusters are part of the informal sector: a segment of the economy characterized by small-scale, labor-intensive, largely unregulated and unregistered manufacturing and service enterprises. The government of Ghana estimates that 25 per cent of people working in the informal sector live in poverty. A high performing cluster can create employment, raise income levels and improve the conditions of work. CLUSTERS AND CLUSTER PROMOTION INITIATIVES

Suame Magazine

Suame Magazine is an informal cluster located in Kumasi, 114 / Rotman Magazine Fall 2009

Ghana and one of the largest clusters in Sub-Saharan Africa. The term ‘Magazine’ is a historical reference to the military armories (or magazines) that were located on the site during colonial times. The Magazine has a working population of over 200,000 people with approximately 12,000 micro-, small- and medium-sized enterprises. These firms are involved in a wide range of activities, with the majority specializing in vehicle repair, spare parts sales and metal works such as casting and welding. The entrepreneurs of Suame Magazine are renowned for their ingenuity. It’s not uncommon to see mechanics huddle around a condemned car one day and a few days later that very car being driven off by a happy customer. This magic draws customers from throughout Ghana and West Africa. I had the pleasure of serving as Interim Manager of the Suame Magazine Industrial Development Organization (SMIDO) for six months in 2008. SMIDO is an umbrella organization of 12 trade associations with a mission to improve the livelihood of the Suame Magazine community. Upon graduation from Rotman, I arranged a late start date of my full time job as a consultant at Accenture to do some volunteer work. A Rotman alumnus who served as my mentor connected me with staff from the Millennium Cities Initiative (MCI), a joint project of the Earth Institute at Columbia University, Columbia Program on International Investment and the United Nations Development Program. MCI is a project aimed at assisting selected mid-sized cities across sub-Saharan Africa in their efforts to achieve the Millennium Development Goal. Researchers from MCI had identified SMIDO as a high potential local development organization and in turn I was sent to there to improve the organization’s capabilities. Organizing an Organization

Upon joining SMIDO, it became clear to me that the organization was filling a tremendous need. Prior to SMIDO’s formation, Suame Magazine lacked a strong representative organization that could act as a voice for the community and an entry point for development interventions. As a result, government and aid organizations were left to navigate the myriad of issues facing Suame Magazine without effective local support. Past interventions tended to be small in scale and infrequent. The birth of SMIDO eliminated this problem and the municipal and national government along with a

Richard with SMIDO executives at his chief ‘enstoolment’ ceremony.

Artisans working outside their shops.

variety donor agencies are now involved in supporting Suame Magazine. With increased attention from the donor community and the government, and the local community in serious need of support, SMIDO was under pressure to meet high expectations. As such, I had two major tasks at SMIDO scale up the current operations and structure the organization for sustainability.

Currently over 100 students per month are learning how to use computers at SMIDO’s training facility. In addition to the basic computer classes, we launched business management training and an introductory course in automotive diagnostics. In December, our first batch of students graduated from the basic computer training program and moved onto these phases. By the end of 2009, we anticipate to have trained over 50 mechanics in automotive diagnostics and another 50 trades people in general business management, including accounting and marketing.

Tackling a Technology Gap

One of the most difficult challenges that the Suame Magazine community faces is adapting to changes in the automotive industry. In the 1980s there was a significant shift in automotive technology as manufactures greatly increased the use of computers in vehicles. As a result, mechanics needed to invest in expensive new diagnostic equipment and retrain in order to continue working in their profession. For the over 50,000 mechanics in Suame Magazine, the situation was particularly dire. Most artisans have only basic levels of formal education and English comprehension so traditional options for skill upgrading such as community colleges or manufacturer-sponsored seminars were out of reach. Furthermore, as the sole income earner for the family, the entrepreneurs have limited time to commit to retraining. SMIDO responded to this challenge by opening a basic computer training school. This was a first step to prepare mechanics for using automotive diagnostics. At the time of my arrival, there was only one instructor with 40 students taking classes. Through a series of interviews with current and potential students, I discovered that the demand for the program would still be high if the number of lecture hours per week was reduced and tuition was increased. With a few simple changes to the lecture schedule and program pricing, we were able to increase the capacity of the program and generate more funds. This allowed us to hire two additional instructors, engage in marketing activities and develop a customized curriculum.

Integration into Formal Sector Supply Chains

A common challenge in underperforming clusters is limited market access. Micro and small enterprises in particular have difficulty convincing large companies that they are capable of carrying out substantial projects. As a result, these enterprises miss out on a significant amount of business. To tackle this challenge, SMIDO wanted to embark on an initiative to integrate enterprises of Suame Magazine into formal sector supply chains. While the desire was present, a methodology was lacking. It was my responsibility to lead a team to design a model that would satisfy the needs of formal sector companies and of the Suame Magazine enterprises. While the formal sector demanded high quality products, on-time delivery and the opportunity to support local development, the micro and small enterprises needed working capital loans, technical expertise and project management assistance. SMIDO was well placed to satisfy the needs of both parties. In our model, SMIDO would conduct negotiations with formal sector companies on behalf of the enterprises of the Magazine and guarantee product delivery and quality. Once a contract was signed, SMIDO would sub-contract the work to enterprises within the Magazine, finance the job and oversee the completion of the project. With assistance from the Ghana Chamber of Mines, I was introduced to a number of leading mining companies in Ghana who agreed to partner Rotman Magazine Fall 2009 / 115

acquire, our executive had to meet with a number of different chiefs on many occasions to present our case as to why our initiative was beneficial for the community and how we intended to carry out the work. Often at these meetings, the chiefs were given various ceremonial gifts to honor tradition. I worked closely with the SMIDO executive to provide the chiefs with a clear picture of what the development might look like in the future and explain how the local community would be involved in the development process every step of the way. By keeping the chiefs well informed and taking their concerns seriously, we built a strong relationship that will help this project succeed. In Conclusion

A spare-parts dealer assesses his inventory.

with us on this initiative. To date, SMIDO has completed a number of contracts, employing over 40 individuals. By acting as an intermediary between the formal and informal sector, we helped mining companies satisfy procurement needs while supporting local development by generating employment and raising income levels of the working poor. Advocating for Modern Industrial Villages

A major SMIDO activity is policy advocacy. SMIDO conducts research on the issues facing Suame Magazine and lobbies for support from all levels of government and the donor community. SMIDO’s most significant advocacy project is aimed at garnering support for the development of a new industrial park. The rationale for the industrial park is twofold. Firstly, Suame Magazine is currently plagued with poor infrastructure and overcrowding, which make it extremely difficult for businesses to grow. A new development would feature paved roads, steady electricity and a water supply and would allow some of the Magazines’ enterprises to relocate. Secondly, a new industrial park would serve as a calling point for foreign investment. With robust GDP growth and the forthcoming production of oil, Ghana is in need of areas primed for industrial development. Through this project, I learned a lot about Ghanaian culture, specifically the role of the chieftaincy institution in business transactions. A significant portion of land in Ghana is owned by chiefs, the traditional leaders or elders of a particular region. Chiefs have the authority to sell land to individuals or businesses at their discretion. However, the process of purchasing land from a chief is not a simple financial transaction. In the case of the land that SMIDO hoped to 116 / Rotman Magazine Fall 2009

There are a number of moments from my time in Ghana that stand out. I remember stepping into a classroom full of adults, long shut out from traditional education institutes, clamouring to answer a question about how using the Internet can improve their business. I recall the pride in the faces of the welders and painters who helped SMIDO deliver its first product shipment to a mining company. A particularly special occasion for me was being made a chief in recognition of my work for SMIDO. At a day-long ceremony featuring traditional drummers and dancers, I was given the formal title of Nana Kofi Richard I, Sompahene of Asenamaso. Sompahene literally means “good servant” and Asenamaso is the district in which the new industrial park will be built. Working in Ghana was simultaneously the most challenging and the most rewarding thing I have ever done. The problems I tackled stretched me intellectually and emotionally, redoubling my commitment to community service. The Rotman School and its students have also taken on an important role in SMIDO’s activities. Fayaz Manji (MBA ’10) was awarded an international work experience bursary from Rotman to work with SMIDO for his summer internship. Katherine Choi (MBA ’09) joined SMIDO in the late summer to lend business management assistance through 2009. I’m certain that both Fayaz and Katherine will make a tremendous impact in Suame Magazine and become better business leaders for it.

Richard Wiltshire (MBA ’08) is a consultant in the Process & Innovation Performance practice at Accenture Inc. in Toronto, Ontario.

Class Notes: Editor Jack Thompson

Fall 2009 – and the alumni population keeps on growing – with over 400 additions this past convocation. Congratulations and welcome! On the very same day, our 11th annual Life-Long Learning day took place and was a tremendous success. The 12th edition, scheduled for end of May 2010 promises to be even bigger and better. Many classes, especially the “honoured years,” celebrated class reunions throughout the spring and summer months (send along your reunion stories and pictures any time of year – they are always welcome.) And of course the next issue will, as always, have room for your stories about your jobs, travels, families, pets, reunions. Send in your next Class Note now, while we’re all thinking of them. That’s staying accountable. -Jack A taste of Canada in Paris Rotman alumni Phillip Lund, David Chalk and Matthieu Flament in Paris at the

Canadian Pub on May 20, 2009, with Rod Lohin (ED, Rotman Alumni Network).

MBA / MCOM / DBA FULL & PART-TIME 1946

Don Chutter says that for the Chinese “this may be

‘The Year of the Ox’, but for his family this is ‘The Year of the Golden Wedding Anniversary’”. It kick-started with a family reunion in Florida, with attendees from Ottawa, Toronto, Vancouver, et al. He and Margaret were married in May, 1959 in Rotterdam. Don has kept one retainer as a consultant and is not looking for any more! He was the sole member of his class at the 60-Year Reunion, but is hopeful to see more of his classmates at the 65-Year Reunion at UofT in 2011.

1955 MBA Class Champion: Roy Williams

[email protected]

1965 MBA Class Champion: Cam Fellman

[email protected]

1966 MBA Class Champion Gary Halpenny

Gary.Halpenny66@rotman. utoronto.ca

1967

1974

MBA Class Champion: Len Brooks

MBA Class Champion: Hank Bulmash

[email protected]

[email protected] Tim W. Kwan was regional sales manager for a Canadian company for a few years until he started his development business. His company built commercial, residential and special uses projects in the Greater Toronto area. Currently semi-retired, he is the President of Mon Sheong Foundation (www.monsheong.org), a charitable organization with 3 Long Term Care, 1 Senior Living, 3 Heritage Schools and other facilities.

1968 MBA Class Champion: George Hayhurst

[email protected]

1969 MBA Class Champion Fred Berg

[email protected] Reunion Alert! MBA class of 1969’s 40th Reunion Dinner. Save the date: October 22, 2009. Full

details are posted on the reunion website www.rotman.utoronto.ca/alumni/reunion Fred Berg is retired after enjoying an interesting and varied career in human resources and education. The Berg family has five grandchildren and spends two or three months a year in Florida.

1970 MBA Class Champion: Charles Johnston

[email protected]

1971 MBA Class Champion: Chris Ward

[email protected]

1973 MBA Class Champion: George Parker

[email protected]

1975 MBA Co-Class Champions: Susan Frank

[email protected] Robert Johnston

[email protected] The non-fiction book Brain Injury by Alan J Cooper continues to sell well in Indigos and is in demand in the Toronto Public and U of T library systems. Alan has recently completed a fiction manuscript on the difference between spirituality and religiosity, and there are plans for it to be published in 2010. Bob Leshchyshen is director of corporate development at CHF Investor Relations in Toronto.

1976 MBA Class Champion: Jane Gertner

[email protected] Rajiv Manucha is president of MSR eCustoms. Headquartered in Toronto, MSR eCustoms is North America’s most innovative customs and global trade compliance company. For more, Rotman Magazine Fall 2009 / 117

Class Notes / MBA/Mcom/DBA Full & Part-Time

see ecustoms.com “The boys are now 15, 12, 9 and 7. This summer Laurie and the younger ones will spend most of July at the cottage (Haliburton if you’re in the area). In August, we’re taking another family road trip - the Canadian east coast this time. I’m still running MSR eCustoms (401 & Allen Road). 28 years - time flies! Our focus has shifted from systems to knowledge-based services: duty recovery, customs brokerage, compliance. It’s still a hoot and business is good on both sides of the border. I’m looking forward to finding a few good VPs though, so there’s more time for tennis! Anyone for a game? Best wishes to all!”

1978 MBA Class Champion Hugh Larratt-Smith

[email protected]

1979 MBA Class Champion Lorn Kutner

[email protected]

1980 MBA Full-Time Class Champion: Frank Hall

[email protected] Anne Donaldson-Page “As I celebrate my 30th wedding anniversary, I reflect on my many blessings - a lovely 14 year daughter, a supportive and loving husband, an 86 year old mother who lives with us, vacation time, work with several volunteer organizations, a great city and country to live in. Life is also satisfying for me on the business front - as Owner and Management Consultant of the firm stratAHEAD, which specializes in sourcing and procurement strategies. While my formal consulting experience comes from Boston Consulting Group, formerly Canada Consulting Group, my passion for strategic sourcing and cost containment comes from many years working in the ‘field’ at both Bank of Montreal and CIBC.

1981 MBA Full-Time Class Champion: William Molson

[email protected] Will Molson, CA has set up a public accounting practice in the Toronto Beaches providing audit, general accounting and tax, and specialized sales tax services... and is walking to work. Will would also like to point out that he, Kate Bishop, Harry Koza, and Gerry Rocchi are in touch and getting together from time to time. Get in touch too!

1982 MBA Full-Time Class Champion: Danny Chau

[email protected] MBA Part-Time Class Champion: Michael Hale

[email protected] For Sid Amster, the connection to the University

118 / Rotman Magazine Fall 2009

of Toronto has been passed to the next generation, “My daughter Allyson now works about 200 meters down the street from the school: she is the coordinator of bikechain, which has been written up in the News@ the University of Toronto repeatedly (bikechain.utoronto.ca ). She has applied to U of T Law for Fall classes. This means we are spending more time in Toronto and are even looking for a new home downtown. Professionally, I have been busy on two fronts our venture fund has just launched a new incubator (www.goodcompanyventures.org ) that is looking for young entrepreneurs - it is open to people in Canada as well. I also continue as an adjunct (1/2 time) at the Fox School of Business and have just completed a guest lecturer stint at The Technion in Haifa.” John Hastings was recently appointed managing director and head of the Institutional Clients Group at Citibank Canada. John was also nominated to the board of directors for Citigroup Global Markets Canada. In his new role, John will provide franchise oversight across all institutional customer segments and product groups, allowing Citi to meet the evolving needs of its clients. John has been with Citi for over 20 years, in numerous roles, most recently as senior banker and managing director of Citibank Canada. George Karski admits to being “a tumbleweed: Toronto, Ft Lauderdale, Rio de Janeiro, Orlando, Charlotte – and next will be drifting back north to the GTA.” In Toronto, George hopes to duplicate his Brazil Carolinas Club, where the sole mandate is to drink caipirinha. (www.brazilcarolinas.com)

1983 MBA Full-Time Class Champion: Leslie Clarke

[email protected] Barbara Anderson is the chief financial officer at MaRS Discovery District in Toronto.

1984

MBA Part-Time Class Champion: Daniel Eng

[email protected] Dan Eng writes, “Yesterday (June 11) our daughter graduated from Materials Engineering and Management from McMaster. So now we are proud parents of 2 engineers. When I am asked about my significant accomplishments in life, I always think about what my ‘kids’ have done with theirs. Congrats to all the other parents and their kids. Enjoy the day in the sun.”

1986 MBA Class Champion: Roy Turunen

[email protected] James Iglesias is on the board of directors for Maple Leaf Environmental Equipment (a member of the Calco Environmental Group). MLEE was a recipient of the Canada’s 50 Best Managed Company Award for 2008 and re-qualified in 2009. The 50 Best Managed award is presented by program sponsors: Deloitte, CIBC Commercial Banking, National Post, and Queen’s School of Business.

1988 MBA Class Champion: Tom Sears

[email protected] Harold Smith is a partner with Mesbur+Smith Architects, one of the world’s leading movie theatre designers with projects in North America, Eastern Europe, South East Asia and the Middle East. See www.mesbursmith.com. Harold and his wife have 3 grown children. In his spare time, he enjoys gardening, hiking, cycling, playing violin and reading.

1989 MBA Full-Time Co-Class Champions: David Pyper

MBA Part-Time Class Champion: Leslie Riley

[email protected]

[email protected] Sylvie (Kirwin) Glossop is a stay at home mother of 5 children ranging in age from 19 to 8 year old twins. She is married to Peter Glossop who is a partner practising competition law at Osler, Hoskin and Harcourt. Besides her mothering responsibilities she enjoys volunteering at her children’s school, in the community and at the Royal Ontario Museum in the biodiversity gallery. She has taken up sailing, earning her intermediate sailor designation. More recently she has taken up running, completing the 2009 Sporting Life 10k run. Richard Freedman is the owner of Cornerstone International, which primarily focuses on facilitating syndicated real estate deals in Canada and the US for offshore investors.

[email protected]

1985

Maria Milanetti MBA Part-Time Class Champion: John Harris

[email protected]

1990 MBA Part-Time Class Champion: Steve Rosen

[email protected] Jim Bennett is a partner and management consultant with Redpoint Business Architects in West Vancouver. Vic Li Preti is manager, portfolio management for the Ontario Ministry of Health in Toronto.

1991 MBA Full-Time Class Champion: David Littlejohn

[email protected]

MBA Full-Time Class Champion: Gerald Legrove

MBA Part-Time Class Champion: Pamela Kanter

[email protected]

[email protected]

MBA/Mcom/DBA Full & Part-Time / Class Notes

Jamie Gerson has recently changed careers as he is

now with Newmans Valve Ltd. of Barrie, Ontario. He is responsible for sales across Eastern Canada. IN MEMORIAM Alexander Rahimi Feb 2, 1966 - Feb 15, 2009

“We would have loved to have walked with you on your journey a little while longer. You will be lovingly remembered and sadly missed by your family and your friends.” His family is also ever changing as there are three boys aged 6, 8 and 10! Whether it’s on the East coast involved with the Voiseys Bay/Kearl Lake projects for work or with Marilyn and the boys at a hockey/baseball/soccer game - Jamie is kept constantly on the move. Jamie sends all the best to his fellow 91 part time MBA grads. Takuya Ishikawa wishes to say, “Hello, dear U of T alumni. Since I departed from Toronto, in the summer of 1991, I’ve been working as a Japanese government official in different ministries such as the Ministry of Land and Transportation, Ministry of Industry, Financial Services Agency. Having finished my job at Financial Services Agency as a director of the Policy Planning division last year, I moved to the Ministry of Land and Transportation as a director of real estate investment market office, which oversees various real estate investment schemes with FSA. I have a wife and two kids, still busy without enough money to retire, I don’t foresee chances to visit Toronto again for now, but hope to meet my classmates someday; Peter, Sue, Alison, Mike, Mr.Social Stephen, etc. and to enjoy Thirsty Thursdays again. The photo was taken at Dulles airport in 2007 with a friend and my kids.”

1992 MBA Class Champion: Blair Kingsland

[email protected] Paul Ostrander is now the president and CEO of Holcim (Canada) Inc, in Concord.

1993 MBA Full-Time Class Champion: Daniel Lin

[email protected] Leslie (nee Slack) Cleland has worked with the United Nations since graduation. Since 2005 she has been living and working in Geneva, Switzerland. Last month she took up a new assignment with the UN Economic Commission for Europe (see www.unece.org) as the executive officer. Leslie invites any of the class of ’93 to contact her should they be in the Geneva area. Randall Craig’s 2nd career planning book, Personal Balance Sheet Practical Career Planning Guide, has won the 2008 Indie Book Awards Gold Medal as best Career Book, the 2008 Finalist in the National Best Book Awards “Business-

General” category, and is also a Finalist in ForeWord Magazine’s 2008 Book of the Year Awards, Business & Economics category. The book is available at Chapters, Amazon, or www.PersonalBalanceSheet.com. Bill Hartwick is senior director of product marketing in the XenApp product group at Citrix Systems in Fort Lauderdale. Bruce Herridge has been coordinating the Police Leadership Program on behalf of the Ontario Association of Chiefs of Police and the Rotman School of Management - Executive Programs for the past nine years. The 10th graduating class was made up of 28 students including 3 senior police officials from the United Arab Emirates and 1 from the United Nations. These international students joined senior police leaders from across Ontario in an MBA style executive learning opportunity. This learning opportunity helps to prepare officers for increased responsibility in their organizations which enhances the quality of policing services within the Province of Ontario and beyond. Bruce is the Deputy Chief in charge of Operations for the York Regional Police who have been a strong supporter of this executive program since its inception. John Hortogiannos has returned from Chicago to Toronto as senior manager, financial performance management for the Bank of Montreal. Daniel Lin is happy to announce the birth of his son Jeremy Matthew Lin born on September 11th, 2008 weighing 8lbs 11oz. Jeremy has already enjoyed his first visit to Disneyland in California. Daniel sends his best wishes to the Class of ’93. Karim Mawji launched Dentonia Park Capital Management LLC, an investment advisor focusing on alternative investment strategies, in February 2009. Dentonia Park is based in New York City, and will soon establish operations in Canada. The firm is named after the former campus of Crescent School, a boys’ school in Toronto, from which Mr. Mawji is a graduate. After earning his MBA at Rotman, Mr. Mawji qualified as a Chartered Accountant with Deloitte & Touche, then worked as an M&A/Restructuring banker. He moved to New York in 1999 and was a sellside analyst at Morgan Stanley before working as an Analyst and Portfolio Manager with a series of small and large hedge funds. He is an advisory director for a private media company and is a CFA charterholder. Mr. Mawji resides in Manhattan with his wife Betty, his daughter Ashira and his son Daelum. Recently they traveled as a family to Panama, Hong Kong and Singapore. Klaus Unterhuber is an associate partner with Esprit Consulting AG, in Vienna.

1994 MBA Full-Time Class Champion: Glenn Asano

[email protected] Glenn Asano is saying good-bye to Beijing. “Next stop… Taipei. After 5 years we can’t wait to get away from the desert and back to the sea! The boys are proud of their mom Daphne who was appointed MD for Thomson Reuters in Taiwan.

Dad carries the luggage fulltime to pay his share of rent… and toils away as a consultant while completing a PhD. His research focuses on the effects of online C2C information on buyer-seller relationships. His goal is to help arm the next generation of marketers… or at least stop carrying his wife’s luggage.” Angelo Lai: After spending four years in Beijing before the Olympics, Angelo returned to work for IBM, based out of Hong Kong again, responsible for Greater China software business for Mid-Market. Canadian enterprises could be a bit more active in developing this market, leveraging our multicultural background. I am more than happy to share my memories and experience with fellow alumni. Our virtual world is binding us together.”

1995 MBA Full-Time Class Champion: Nick Strube

[email protected] MBA Part-Time Class Champion: Darlene Varaleau

[email protected] Jim Davidson is principal of Competitactics, an agile consulting firm that provides companies with a competitive edge. Competitactics launched a national Mystery Shopper program, positioned as a membership benefit to local chambers of commerce, www.chamber-mysteryshop.com.

1996 MBA Full-Time Co-Class Champions: Christine Wong

[email protected] Suzanne Wilcox

[email protected] MBA Part-Time Class Champion: Daisy Azer

[email protected] Carolyn Gaunt is “rapidly moving toward the third year of my doctor of management program specializing in organizational leadership. This summer is all about putting the dissertation proposal together, with plans to conduct research n the spring of 2010.” Athena Lee is senior manager, organizational planning at Neo Derm Group in Hong Kong. Glen Ponton is division finance manager at Nestle Waters Canada, in Guelph. Claude K. Sam-Foh is an enterprise architect with the Ministry of Government Services, Government of Ontario. Claude has also worked at Ryerson since 1997.and is currently a parttime faculty member in the School of Information Technology Management. He teaches various courses, including Business Information Systems, Systems Analysis and Design, Enterprise Resource Planning, Information Technology and Strategic Management, Applied Feasibility Study and IT Project Management. Charles Teixeira is the managing director and CAO Equities, EMEA for Nomura in London (UK).

Rotman Magazine Fall 2009 / 119

Class Notes / MBA/Mcom/DBA Full & Part-Time

1997 MBA Full-Time Class Champion: Burke Malin

[email protected] MBA Part-Time Class Champion: Nancy Crump

[email protected] Mozes, a leader in mobile marketing, recently announced that its founder and CEO, Dorrian Porter, has been named to the 2009 Silicon Valley/San Jose Business Journal’s ‘40 Under 40’ list, which comprises 40 young professionals under the age of 40 chosen based on their entrepreneurial spirit, community contributions and impact on their respective industries in Silicon Valley. Porter was selected for his role as an innovator and visionary in the area of mobile marketing. As CEO of Mozes, Dorrian is responsible for the overall strategy and day-to-day operations of the company and its ongoing efforts to evangelize mobile experiences as a must-have element in today’s marketing mix. Porter holds a law degree and MBA from the University of Toronto and a bachelor’s degree in Public Policy and Administration from the University of Ottawa.

1998 MBA Class Champion: Mari Iromoto

[email protected] Viraj Desai is now in her third year as managing director for the consulting company that she founded – CIM Professional Services - which provides strategy, operations, process and corporate performance measurement services across a wide range of industry sectors. On the leisure side she continues her quest to see the world and is heading off to Vietnam, Cambodia and Laos with her husband and 2 boys aged 14 and 16 this summer. Dennis Kwong joined Centerra Gold Inc. as vice president, business development in October 2008. In this role, Dennis directs the activities focused on non-organic growth of the organization by identifying, evaluating, recommending, and negotiating value-adding business opportunities including corporate acquisitions. After pursuing his Masters of Science at McGill University and his MBA at Rotman, he joined PriceWaterhouseCoopers, and obtained his Chartered Accountant designation. Dennis joined Noranda (subsequently Falconbridge and Xstrata) in 2002 where he assisted with their business strategy for China and advanced to several positions of greater responsibility. Marcelo Morales is the chief executive officer for HollisterStier Laboratories and Draxis Pharma, a global pharmaceutical and contract manufacturing organization. Marcelo and his wife Susan are enjoying their time between Canada and the United States, together with their two sons Nicolas and Benjamin.

1999 MBA Full-Time Co-Class Champions: Lenore Macadam

[email protected] Aran Hamilton

120 / Rotman Magazine Fall 2009

[email protected] Tom Elliott continues to enjoy his role as VP corporate development with Kinross Gold in Toronto. Jennifer Steckel Elliott has been VP marketing at Danier Leather in Toronto for over a year and is thoroughly enjoying the mix of fashion and business. Both are amazed at how quickly their children Jaqueline (5) and Turner (3) are growing, and how much devotion the Mooredale Soccer House League requires, and gives back in terms of laughs and goals for each side! Andrea Sloan is now program manager at Marketing Innovators International, in Chicago.

2000 MBA Class Champion: Mitchell Radowitz

[email protected] Jonathan Lister is currently managing director and head of Google Canada. Prior to Google, he was COO of AOL Europe, based out of London. He and his wife Heather have four children: Ruby and Finn are 7 and 5; and they were recently joined by twin sister and brother Ivy and Hank. Donna Shear has moved from Northwestern University Press to become Director of the University of Nebraska Press, one of the largest university presses in the U.S. She is currently commuting back and forth to Chicago from Lincoln, Nebraska, but is hoping that, by the time you read this, her husband has joined her in Lincoln. Meanwhile, Donna’s son, Daniel Weber, graduated from Boston University in May and has commissioned as a second lieutenant in the United States Air Force.

2001 MBA Part-Time Co-Class Champions: Lisa Sansom

[email protected] Walter Sophia

[email protected] Catherine Graham (Ward), Mark and big brothers Matty and James are thrilled to announce the arrival of Alexandra Suzanne on May 26th, 2009. The boys are excited to have a little sister and mom is glad to no longer be so outnumbered! Catherine can be reached these days at [email protected]. Waleed Qirbi is the president and founder of VoicePC Inc., a company based in Ottawa with an office in Cairo. Specializing in speech recognition, and related technologies, VoicePC has emerged as a leader in this field. Currently living in Ottawa, Waleed has spent most of the past three years travelling between Canada, Europe, the Middle-, and Far-East; and is looking forward to his annual visit to Rotman each June. Lisa Sansom continues her passion for life-long learning and has been accepted to the University of Pennsylvania’s Masters program in Applied Positive Psychology, starting in September 2009. Lisa will continue to live in Kingston, Ontario, and commute down to Philly for the class weekends. Upon her graduation, Lisa will be one of very few

Canadians with the MAPP credentials, and looks forward to incorporating this new knowledge and perspective in her coaching and consulting work. Lisa welcomes connections through Facebook and LinkedIn.

2002 MBA Full-Time Class Champion: Rizwan Suleiman

[email protected] MBA Part-Time Class Champion: Jay Nicholson

[email protected] Peri and David Diestel, and the boys, Ben & Josh, “have now settled in to life down here in South Florida. Everyone is very busy and the boys especially are enjoying life in the sun although with all their sunscreen they still look like they live in Toronto. Look us up when you are on vacation down here.” In April, Aaron Eckler accepted a position as manager, sales and new client development with Medcan, North America’s largest provider of executive healthcare. Medcan leads Canada in preventive healthcare services dedicated to keeping busy people healthy. A snowboarding accident (in which he saved a young child) shattered Aaron’s lower back in 2007, but he has made a full recovery, and is looking forward to hitting the slopes this coming season. Aaron was married on a beach in Aruba in 2008 with family and friends, including several Rotman alumni, and now makes his home in Oakville with his wife, 2 dogs, and cat. Jonathan Friedman is an associate at Stubbs Alderton & Markiles, LLP, in Los Angeles, California. Stubbs Alderton & Markiles, LLP is a corporate, securities and intellectual property law firm focusing on the representation of emerging growth and technology companies, middle market public companies, large technology companies, investors, private equity funds, investment bankers and underwriters, and clients in the entertainment industry. After marrying Judith Leone in 2005, the Friedman family welcomed Aaron and Sophia into the world in September of 2008. The Friedman’s are now focused on getting as much sleep as they can in between feedings and diaper changes. Elena Yampolsky is rates analyst at PowerStream Inc, in Vaughan, ON.

2003 MBA Part-Time Co-Class Champions: Jennifer Chan

[email protected] Rajesh Dixit

[email protected] Francesca Birks is a senior consultant and analyst at Arup, an international design and engineering consultancy. She divides her time between

MBA/Mcom/DBA Full & Part-Time / Class Notes

sustainability consultancy and facilitating foresight and strategic organizational design. Louis Florence has just completed his PhD in Higher Education at OISE/UofT. His thesis topic was on ‘The Value of the MBA’, and he is pleased to report that the large majority of over 600 respondents to his online survey ‘agreed’ or ‘strongly agreed’ with a variety of metrics indicating that their MBA was valuable to them, and enabled them to contribute in a variety of ways to their organizations. Negar Sedghi is a marketing manager with Tetra Pak in Tehran.

Jason Wodlinger has been working at RD Media

2004

[email protected]

for the past three years overseeing the finance and digital departments for the advertising division. RD Media owns websites and magazines including rd.ca, besthealthmag.ca, ourcanada.ca and Reader’s Digest. Recently Jason has begun consulting for digital media clients (wodlinger.com) and he welcomes fellow graduates to contact him. His son Henry turned five this summer and has ordered his father to make it a priority to kick his feet back and enjoy the sun.

2005 MBA Full-Time Co-Class Champions: Fiona Cunningham

MBA Full-Time Class Champion: Adriane David

Tanbir Grover

[email protected]

MBA Part-Time Class Champion: Bob Kapur

MBA Part-Time Class Champion: Steven Lane

[email protected] JP Beaudoin is a managing partner at Cedarhurst Capital Partners as well as senior executive consultant with Gardent Capital Group. Paul Budovitch is the vice president of Geosam Investments Limited, a private investment company with offices in Toronto, Montreal and Halifax. Lizanne Correa is a senior manager, card product and customer solutions for BMO Financial in Toronto. For her significant contributions to unity and cohesiveness of the Etobicoke Chapter, Linda Drisdelle has been named a member of the Professional Engineers Ontario (PEO) Order of Honour. Linda’s service on the executive of PEO’s Etobicoke chapter includes two years as chair, and stints as chair of the Nominating Committee and secretary – a position she still holds. She has also edited the chapter’s newsletter for the past several years. For many years she has also been an active participant in the chapter’s National Engineering Week subcommittee to promote the profession in local schools. In 2008, she was a key member of the team that organized the chapter’s highly successful Engineering Idol design competition for high school students, under the principle that “if the answers were always known or easy, there would not be a need for engineers.” Louise Hughes (Bach) is group head of financial accounting at Telefonica Europe plc in London. Zahra and Karim Keshavjee are proud to have a new addition to their family, Zafira, who is “growing up very fast. It seems that just yesterday she was born and now she can almost sit and wants to play with a computer.” Henry Liu has been recently transferred to P&G Prestige Beauty office in the New York City as marketing director, SK-II – one of the fastestgrowing luxury skin-care brands in the U.S market. See SK-II.com for details. Bradley Smith is a group marketing manager for L’Oreal Canada in Montreal.

[email protected]

[email protected] Tayyab Ali Shah is working for the government of Saskatchewan as an internal auditor. Avidan de Lara has relocated to Zurich to become marketing manager for eBay International Marketing GmbH. Jasmine Gill is associate counsel for Harlequin Enterprises Ltd in Toronto. Kena Paranjape is director of merchandising at Pistachio in Toronto. Nader Tehrani is vice president of finance for United Arab Chemical Carriers in Dubai.

2006 MBA Full-Time Co-Class Champions: Bill Fox

[email protected] Paul Nagpal

[email protected] Paul Forma

[email protected] Shruti Owerie

[email protected] MBA Part-Time Class Champion: Ushnish Sengupta

[email protected] Geoffrey Cambridge is a supervisor with Matson Driscoll & Damico in London (UK). Jeronimo De Miguel, along with his sister Alejandra and her partner, have launched Vintage One (V1) – a custom winemaking enterprise in the west end of Toronto that sources premium grapes from some of the world’s best vineyards to offer clients an opportunity for unparalleled winemaking under the expert advice of Argentine oenologists (and parents) Mabel & Alejandro De Miguel. For more, visit vintageonewines.com. Sumer Dhillon is an entrepreneur who has successfully built businesses in different parts of Alberta including a liquor store chain, motels and restaurants with a net worth of $8 million. He leads a team of 27 employees. Kevin Douglas has relocated back to Toronto as a senior analyst, wines with Corby Distilleries. Corby represents Jacob’s Creek & Wyndham Estate (Australia); Stoneleigh & Brancott (New Zealand); Campo Viejo & Real Sangria (Spain);

Graffigna & Etchart (Argentina); Black Tower (Germany); Castillo de Molina & Gato Negro (Chile). Recently engaged, Kevin will be getting married next July. William Hui is an assistant vice president of New World Strategic Development, private equity arm of New World Development in Hong Kong. “Moving from investment banking to private equity definitely gives me more control of worklife balance. Working with Asian real estate tycoons on a daily basis is thrilling. We are looking for investment internationally, if you have any interesting opportunities, shoot me an e-mail.” Omar Javed is taking over as the head of integration at Dubai World Central. DWC is a 140square kilometre urban aviation project centred around what will be the world’s largest international airport. It aims to transform Dubai into one of the most powerful global centres for logistics, tourism and commerce. More at dwc.ae. Omar’s role, broadly, will be to oversee the development and execution of the business strategy for the Group. Al Leong is CEO of TTR | Three Towers Residential in Toronto, providing corporate housing to professionals, consultants and executives including IBM, GM and international travellers. During the past winter and spring, Al spent three months in Chicago (checking out the Trump Towers project) before and after the Obama elections, volunteered for Olivia Chow in the Canadian elections, then headed to California: Oakland, SF, Pt Reyes, Antioch LA / Santa Monica, Bel Air, Oklahoma City. He drove back with Sarah, the Pitbull through Waco Texas a day before the massive brush-fires hit Texas, and then back up to Chicago, Detroit, and Toronto. He now lives in Scarborough half-time by a wooded ravine with lots of greenery where he enjoys peace and quiet with Sarah. Paul Nagpal, Ajay Jain and Bill Fox are proud to announce the success of their latest ventures, TJT Realty and TJT Financial, (tjtrealty.ca, tjtfinancial.ca). “We opened our doors in Markham in December, 2008 and have since added over 10 new members to our team, including some familiar faces from the Class of 2006: Moshe Morris, Lena Koke and Felicia Predie.” TJT Realty and TJT Financial serve both the commercial and residential real estate markets and offer a broad range of services, from buying and selling a first home to brokering real-estate investments and providing financing. “We are excited by the growth and hope to continue to expand our Rotman team!” John Pennal is an IT strategy consultant for BMO. He recently bought a house and he and his family just finished building a new deck for it. Avinash Sohal finished a three-year stint with Johnson & Johnson and recently joined Covidien, another medicaldevice industry heavyweight based in Montreal. Any Rotmanites in Quebec – “feel free to contact me, as me, Deepali and daughter Anshika have a huge social affiliation gap to fill.” Ryan Starkman and Rebecca Perlin are excited to announce the birth of their daughter Evan Aliya on May 17. Weighing in at 7lbs 10oz, and wearing a

Rotman Magazine Fall 2009 / 121

Class Notes / MBA/Mcom/DBA Full & Part-Time/Executive MBA

yellow sleeper, she is constantly doted on by her big brother Jake. Ryan continues to work for TD in the Commercial Banking Division.

2007 MBA Full-Time Co-Class Champions: Francois Cartier

[email protected] Chokks Natarajan

[email protected] Nobu Soda

[email protected] Patrice Bansa

[email protected] MBA Part-Time Co-Class Champions: Kate Armstrong

[email protected] Zhen Xiang

[email protected] In April 2009, Ahmed Abouel-Kheir became a senior financial analyst at Unilever Canada, supporting the western sales team. “If you work in downtown, send me an e-mail and let’s meet!” Parul Agarwal is a senior consultant with Coremotive, a management and technology consulting firm focused on the health care sector. She recently managed an operating room transformation project at St. Joseph’s Health Centre. Parul is working towards her PMP and Lean & Six Sigma certification. She married Akash Mittal on October 12, 2008 and they are moving into their new home in November 2009. Rachel Gillespie is a senior consultant with FTI in Toronto. Peter Lizon is a research associate at Genuity Capital Markets in Toronto. Ronald Tsang is an associate with Thomas Weisel Partners in Toronto. Dennis Woo is a senior consultant at Deloitte within its corporate strategy practice. The past year has kept Dennis on the road quite a bit, but he is now on a longer-term project in Toronto until August. In December 2008, Dennis and Selene went to Australia for a little sun and surf for three weeks before the Christmas holidays. When he’s not at work he’s busy making sure his home renos are going smoothly. Dennis hopes all is well with the class of 2007 and looks forward to seeing his classmates soon!

2008 MBA Full-Time Co-Class Champions: Colin Dabisza

[email protected] Azadeh Dehghanpour

[email protected] Shakila Hashmi

[email protected] Sid Sharan

[email protected] MBA Part-Time Co-Class Champions: Jennifer He

[email protected] Surendra Nawbatt

122 / Rotman Magazine Fall 2009

[email protected] Grace Patenall

please contact me at [email protected]”

[email protected]

2009

Amy Young

Derek Goring is the director of development for Waterfront Toronto, a government-owned development company tasked with revitalizing Toronto’s waterfront. “We have a bold vision to create a waterfront that changes the face of the city and becomes the envy of the world. For more information on how we’re moving from planning to implementation, visit waterfrontoronto.ca.” At press time, Derek and his wife Andrea were expecting their first child in July and were “very excited to become parents!” Amin Nathoo is an investment associate with TD Asset Management on the U.S. Equity team. He is also currently planning his wedding to Khati Bandali (also MBA ’09). Andrew Szabo is a director with TELUS’ advisory services group. With school finally done, he is concentrating again on mountain bike racing with some 24hr events, and a seven-day stage race through the Rockies in August.

[email protected] Arash Barol is product manager for NexJ Systems in Toronto. John Carinci is part of the graduate leadership program at RBC. Alain Gauvin recently moved back to Ottawa to assume his new role at Canada Post Corporation as director of international business development. Alain is responsible for establishing new sources of revenue for Canada Post by positioning its intellectual property portfolio in foreign markets. Andrew Hall is a commercial advisor for Epcor in Calgary. Altaf Kassam is a consultant with Baycrest Health Centre in Toronto. Joanna Kirke is a manager of human resources for the retail risk management business at TD Canada Trust. She would like to extend an invitation to the women of Rotman to take part in an opportunity to move women out of poverty by way of a sustainable economic development plan with the Canadian Women’s Foundation. “With a pledge of $41/month, you can give the tools, training and support to a woman to help her establish her career - just as we have been given this gift as well. Please visit canadianwomen.org. It’s a great way to give back in a way that works.” Vivek Mehta is a management consultant with KPMG in Toronto. The Rotman Three-Year MBA class of 2008 is proud to announce that their classmate, Ahmed Qureshi “has finally joined Facebook. Next to graduation from Rotman, this is Qureshi’s most storied accomplishment. Despite his foray into digital media and social networking, Mr. Qureshi has yet to finalize his profile pic selection (current profile pic shown here). Please join us in welcoming Ahmed Qureshi to the 21st century!” Fernando Sepulveda is a senior manager of international wealth structuring and U.S. private banking at Scotiabank in Toronto, supporting and enabling the strategy and growth of the offices in Miami, Bahamas, Cayman Islands, Puerto Rico and Hong Kong. Fernando spends most of his free time practicing a variety of sports (snowboarding, windsurfing, swimming, soccer and others) and is a music aficionado. Yarina Tarasenko is senior associate for reorganization and restructuring/insolvency at Grant Thornton LLP in Toronto. Robert Tomchick has relocated to Palo Alto as executive director, premier customer network at SAP. Richard Wiltshire is a consultant at Accenture Inc. Prior to this, he volunteered with the Suame Magazine Industrial Development Organization (SMIDO), an NGO in Kumasi, Ghana. He continues to support SMIDO by recruiting volunteers and to date, two more Rotmanites have joined SMIDO to lend their expertise. “If you are interested in volunteering in Ghana,

EXECUTIVE MBA 1985 Class Champion: Bob White

[email protected]

1986 Asher Lepkin is the president of New Paradigm

Partners Limited in Toronto.

1987 Class Champion: Vitor Fonseca

[email protected]

1989 Co-Class Champions: Peter Murphy

[email protected] Bill Brown

[email protected]

1990 Class Champion: Jeffrey.Wayne

[email protected]

1991 David Pleasance is a partner with Deloitte Consulting in Atlanta.

1993 Class Champion: Andy Hofmann

[email protected] Frederick Innis is a partner with Canada’s secondlargest independent investment banking firm. He has completed investment banking assignments in the B2B software development sector, the junior resource sector and in the medical waste

Executive MBA / Class Notes

industries. Frederick currently advises on the lifecycle needs of private companies in the Prairie Region, managing relationships with multiple stakeholders at the intersection of government, business and finance.

1994 Class Champion: Andrew Stewart

[email protected]

1995 Class Champion: John Ramdeen

[email protected] Tom Stevens is director of business development for IFG Project Resourcing in Toronto.

1996 Co-Class Champions: Jon Waisberg

2001 Co-Class Champions: Ken Hagerman

[email protected] Gary Ryan

[email protected] Barb and Mike Cole are delighted to announce the arrival of twin girls. Patrick McLean is executive director, corporate marketing at Verizon Communications and has relocated along with his wife Kelly and son Michael (20 months) to the greater New York City area. Pat took some time off with his family after a great seven years at Bell Canada, where he was a key member of the executive team for Sympatico. He is looking forward to a great new challenge at Verizon where he will be leading their consumer eCommerce and interactive marketing organization.

[email protected]

2002

Carmine Domanico

Class Champion: Cheryl Paradowski

[email protected]

1997 Class Champion: Jennifer Hill

[email protected]

1998 Class Champion: Ashok Sharma

[email protected]

1999 Co-Class Champions: Steve Doede

[email protected] Desmond Preudhomme

[email protected]

2000 Co-Class Champions: Jennifer McGill-Canu

[email protected] Bruce Lawson

[email protected] David Chalk is a fund manager with Latitude Capital Management, a small French boutique hedge fund focusing on Japanese equities. The Chalk family moved to France in 2006. He is often heard muttering Churchill’s famous remark “if you are going through hell, keep going”! David sends his kindest regards to his classmates and encourages them to contact him if and when they come through Paris. Jennifer McGill-Canu is back in Canada after nearly 10 years living and working abroad most recently as the director of strategy & marketing for Lafarge Gypsum in South Africa, and is enjoying catching up will former classmates and teachers. Jennifer ‘brought home’ three new Canadians: Husband Cedric Canu, sons Nicolas (age two) and William (one).

[email protected]

2003 (EMBA 19) Class Champion: Jennifer Figueira

[email protected]

2003 (EMBA 20) Co-Class Champions: Garry Chan

[email protected] Susan Walsh

[email protected] The Hive Strategic Marketing Inc. has hired Sabaa Quao both as a partner and to fill the newlycreated role of vice president of strategy, emerging platforms. A native of Montreal, Sabaa just returned from London, UK, where he served as CEO of software solution company Capacity Networks. Quao has also served as CEO of a design, advertising and branded content company called XCorporation, and owns several intellectual properties that he now brings to Hive. Hiring Quao is part of Hive’s strategy to develop its American footprint. Currently, Hive develops promotional strategies for whisky brand Jack Daniels in the U.S, but is developing its digital capabilities.

2004 (EMBA 21) Co-Class Champions: Fariba Anderson

[email protected] Paul McKernan

[email protected] Florent Chauvancy is head of engine programs at Turbomeca, in Bordes, France.

2005 (EMBA 22) Class Champion: Michele Henry

[email protected] Jeffrey Brown, past VP, CI Investments with 13

years of business development, marketing, investment banking, and capital markets experience, is now seeking new challenges in any industry. Top contacts and references. Brad Einarsen was promoted to senior digital strategist at Klick Communications , moving to the User Experience group, reporting to the VP of Digital Strategy. “I’m sure Jim Fisher would be proud as I will be using all the Rotman strategy knowledge.”

2005 (EMBA 23) Co-Class Champions: Karen Sparks

[email protected] Joyce Rankin

[email protected]

2006 (EMBA 24) Co-Class Champions: Elizabeth Duffy-MacLean

[email protected] Linda Jussaume

[email protected]

2006 (EMBA 25) Class Champion: Rob Ljubisic

[email protected] Craig Goom is senior manager of global product management and marketing at American Express, in Markham.

2007 (EMBA 26) Class Champion: Serge Messerlian

[email protected] Todd Barclay is vice president at Cara Operations in Toronto. Capt. Andrew Morgan has spent his time since graduation providing leadership to the start-up of the new Salvation Army Toronto Harbour Light Ministries. Effective July 1, 2009 Andrew was appointed to Budapest Hungary as the Salvation Army’s Regional Commander, giving oversight to all Salvation Army operations in Hungary. Thomas Ting is a consultant with the Ontario Ministry of Government Services in Toronto.

2008 (EMBA 27) Co-Class Champions: Raja Shankar

[email protected] Katherine Hanratty

[email protected] Dewey Lee is director of business support and analysis at Harry Winston Diamond Corporation. He and his wife Jennifer welcomed their first child, Daniel Owen Lee, to the world on April 6th, 2009, weighing six pounds ten ounces. “He can’t wait to meet all of EMBA 27!” Richard Ting is market manager for Cardinal Health Canada, in Vaughan.

Rotman Magazine Fall 2009 / 123

Class Notes / Executive MBA / OMNIUM/GEMBA

OMNIUM / GEMBA (GLOBAL EXECUTIVE MBA) First we take Zurich…

Rotman alumni gathered on May 14 and 15 at the inaugural Omnium GEMBA alumni event in Zurich. Co-hosted by Dr. Wolfgang Jenewein of the University of St. Gallen and Danny Cushing of Rotman (both partners in the innovative Omnium global executive MBA program), it attracted 38 alumni from around the world. The event featured a reception at the private club of Dirk Lohmann (Omnium 2007), speakers at the famed Hotel Zum Storchen, and a spectacular twilight dinner on Lake Zurich.

1998 Class Champion: Lan Nguyen

[email protected]

1999 Class Champion: Jim Coutts

[email protected]

2000 Class Champion: Nancy Dudgeon

[email protected] Andrea Abt is VP of global procurement in the Siemens IT Services and Solutions Division. Located in Munich, she lives close to Lake Constance with her husband and continues to enjoy her favourite hobby: gliding. Claudia Eller is head of global mobility for Novartis Pharma, based in Basel, Switzerland. Thilo Stadler is managing director, Italy for Grunenthal-Formenti, in Milan. Thilo is also regional manager for Austria and Switzerland.

2001 Co-Class Champions: Margaret Evered

[email protected]

2002 Co-Class Champions: Manfred Koo

[email protected] Petra Cerhan

[email protected]

2003 Co-Class Champions: Michal Berman

[email protected] Susanne Justen

[email protected] Dieter Burki is Head of enterprise risk management & internal audit at Nobel Biocare in Zurich. Vera Lo is vice president at AeroTek Manufacturing Ltd in Whitby, ON

124 / Rotman Magazine Fall 2009

2004 Co-Class Champions: Ralf Martinelli

[email protected] David Di Felice

[email protected] The GEMBA ’04 class recently held its second reunion event in three years, this time in the south of France (Cote d’Azur) between May 16 and May 23, at a beautiful villa in Saint Raphaël. The French wine flowed along with the Austrian and German beer. The group toured many of the wonderful cities of the French Riviera including: SaintTropez, Monaco, Cannes, Nice, Grasse and Saint Raphaël. The reunion event was capped off by the first ever GEMBA ’04 Bocce Open; an intense competition that pitted teams of two against one another in an elimination bocce tournament. Alumni, family and friends competed against each other on the last evening of the reunion. In the end, the all-Austrian team of Uwe Leopold and Hermann Kaineder was victorious. The champions celebrated their victory by driving off in a brand-new BMW X5. Special thanks for organizing the 2009 GEMBA ’04 Rendezvous go to Herbert Wagner. A special thank you also goes out to Frank Reuter for hosting the Canadian GEMBAs in attendance. During the week that followed the rendezvous, Frank hosted and showed the Canadians the wonders of Mömlingen, Aschaffenburg and Frankfurt. Plans are already underway for the next reunion.

2006 Class Champion: Cecilia Mueller-Chen

[email protected] Karin Peschl is a partner with Boyden International, a global leader in executive search located in Bad Homburg, Germany.

2007 Co-Class Champions: Dirk Lohmann

[email protected] Simardeep Gill

[email protected]

2008 Class Champion: Kyle Winters

[email protected] Nikolay Samofatov was recently named CEO of Red Soft Corporation, a supplier of database technology based in Moscow, Russia. The picture was taken in May 2009 in NYC Central Park, and the little one is Nikolay’s youngest son, Jacob.

2009 Alex Arifuzzaman is a partner with InterStratics Consultants Inc., in Toronto.

HELP YOUR CLASSMATES VOLUNTEER AS A CLASS CHAMPION Class Champions ensure that their class remains active and vibrant long after graduation. They bring the Rotman School and its graduates closer together by organizing reunions, promoting events and keeping track of their classmates’ activities for inclusion in Class Notes. To represent your graduating class, contact the Rotman Alumni Network at (416) 978-0240, or via e-mail at [email protected].

Upcoming Events Complete details are available at rotman.utoronto.ca/events

September 9, 6:00-8:00pm Rotman Expansion Groundbreaking Celebration September 14, 5:00-7:00pm Women and Leadership Series Speaker: Irene Rosenfeld, Chair and CEO, Kraft Foods, Inc

Yes, that David Rosenberg.

September 21, 5:30-7:30pm, Winnipeg Canadian Business History Series Speaker: Joe Martin, Director, Canadian Business History Program @ Rotman; Author, “Relentless Change: A Casebook for the Study of Canadian Business History” September 22, 5:00-7:00pm Design Thinking Series Speaker: August de los Reyes, Principal Design Director, Microsoft Surface

DAVID ROSENBERG, former Chief North American

Economist of Bank of America/ Merrill Lynch, has joined Gluskin Sheff as Chief Economist & Strategist, further enhancing the strongest investment team in our 25-year history. David’s proven ability to analyze and foresee global trends complements our demonstrated strength in bottom-up security selection. For management of portfolios of three million or more please call Ron Lloyd or Tim Stinson at 1- 866 - 681- 6001.

September 24, 4:00-6:00pm Women and Leadership Series Speaker: Sylvia Ann Hewlett, Founding President, Center for Work-Life Policy; Author, “Top Talent: Keeping Performance Up When Business is Down”

g lu s kin s he f f .c om

October 14, 8:00-9:10am Strategic Management Series Lecturer: Vinaushil Gautam, Professor of Management and Al-Sagar Chair Holder, Indian Institute of Technology October 14, 5:00-7:00pm International Business Series Speaker: Wendy Dobson, Professor and Director – Institute for International Business @ Rotman; Author, “Gravity Shift: How Asia’s New Economic Powerhouses Will Shape the 21st Century” October 21, 4:30-6:15pm Annual Mental Health in Workplace Forum October 27, 5:00-6:15pm Innovation in Business Series Speaker: Scott Anthony. President, Innosight LLC; Author, “The Silver Lining: An Innovation Playbook for Uncertain Times”

September 29, 5:00-7:00pm Canadian Business History Series Speaker: Joe Martin, Director, Canadian Business History Program @ Rotman; Author, “Relentless Change: A Casebook for the Study of Canadian Business History”

October 28, 5:00-6:15pm Leadership Experts Series Speaker: Matthew Barrett, former Chair and President, BMO Financial Group and former Chair and CEO, Barclays plc

September 30, 5:00-6:15pm Innovation in Business Series Speaker: Jonathan Lister (MBA 00), Managing Director, Google Canada

October 29: 5:00-6:15pm Social Media Series Speaker: Gary Vaynerchuk, Author, “CRUSH IT: Why Now Is the Time to Cash In on Your Passion”

October 1, 5:00-6:15pm Design Thinking Series Speaker: Sohrab Vossoughi, President, Ziba Design

October 30, 2009, 8:30am-5:00pm Rotman MBA Leadership Conference Speakers as of July 24: Barbara Stymiest, COO, RBC Financial Group, Michael Horgan, Executive Director, International Monetary Fund, Leigh Gallagher, Senior Editor, Fortune Magazine, Robert Deluce, CEO, Porter Airlines, Jonathan Greenblatt, Co-Founder, Ethos Brands, Henry Gonzalez, VP, Emerging Markets and Microfinance, Morgan Stanley, Andrew Winston, Founder, Winston Eco-Strategies, Michael Lee Chin, Chair, Portland Holdings, Don Morrison, COO, Research in Motion, Beth Comstock, CMO, GE

October 8, 7:00-9:00pm, Hong Kong International Business Series Speaker: Wendy Dobson, Professor and Director – Institute for International Business @ Rotman; Author, “Gravity Shift: How Asia’s New Economic Powerhouses Will Shape the 21st Century”

Wea l t h a nd Risk M an a g e m e n t

October 13, 4:00-5:15pm Talent Management Series Speaker: Michael Lee Stallard, President, E Pluribus Partners; Author, “Fired Up or Burned Out: How to Reignite Your Team’s Passion, Creativity, and Productivity”

Rotman Magazine Fall 2009 / 125

Roger Martin: The Virtue Matrix Reloaded

5 Important and Timely New Books by 5 Rotman Professors

Integrity: Without it, Nothing Works

George Loewenstein: How Mattering Maps Affect Behaviour

The Magazine of the Rotman School of Management / Fall 2009

“Relentless Change: A Casebook for the Study of Canadian Business History” (Rotman/U of Toronto Press, Fall 09) by Joe Martin, Adjunct Professor and Director, Canadian Business History Program @ Rotman

“Becoming the Evidence-Based Manager: Making the Science of Management Work for You” (Society for Human Resource Management/Davies-Black Publishing, Fall 09) by Gary Latham, Secretary of State Professor of Organizational Effectiveness @ Rotman

“The Design of Business: Why Design Thinking is the Next Competitive Advantage” (Harvard Business, Fall 09) by Roger Martin, Dean

“Dia-Minds: Decoding the Mental Habits of Successful Thinkers” (Rotman/U of Toronto Press, Fall 09) by Mihnea Moldoveanu, Professor and Director – Desautels Centre for Integrative Thinking @ Rotman and Roger Martin, Dean

Accountability

“Gravity Shift: How Asia's New Economic Powerhouses Will Shape the 21st Century” (Rotman/U of Toronto Press, Fall 09) ” by Wendy Dobson, Professor and Director – Institute for International Business @ Rotman

Available from bookstores, chapters.indigo.ca, amazon.ca and amazon sites worldwide Rotman book events in Toronto, New York, London (UK), Hong Kong, Calgary and Winnipeg: rotman.utoronto.ca/events

105 St. George Street Toronto, Ontario, Canada M5S 3E6

Publication Mailing Agreement Number: 40062461

Accountability Fall 2009