Book Excerpt
Profit with Honor : The New Stage of Market Capitalism
by Daniel Yankelovich

An excerpt from Profit with Honor : The New Stage of Market Capitalism by Daniel Yankelovich, published 2007 by Yale University Press.
Book excerpt reprinted with the permission of the publisher.
Copyright © 2007 Daniel Yankelovich

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BOOK EXCERPT

The year is 2007. The stewardship ethics movement starts slowly and quietly in two categories of companies. The larger category consists of companies that Wall Street calls "fallen angels" -- companies whose once sky-high stock prices have plummeted and whose reputations have become tarnished. Scandal has wounded some of the fallen angels, like Shell, Fannie Mae, AIG, Merck, and Marsh and McLellan. Other fallen angels, like Altria and Monsanto, have suffered for other reasons -- Altria because of its link with cigarettes, Monsanto because of its link with genetically modified organisms (which their opponents have termed "Frankenfoods").

In the boardrooms and management retreats of these companies, the conversation focuses incessantly on plans for rejuvenation. The most thoughtful executives realize that neither business-as-usual nor public relations spin will restore these companies to their past glory. If they are to regain their former standing, they will have to break old patterns. The executives begin to develop strategies for doing so.

The second category of reformers and innovators comprises leadership companies like G.E., Vanguard, Toyota, Dell, and Procter and Gamble, which see opportunities to broaden their lead over competitors even farther. They realize that reinforcing such ethical values as integrity, openness, and innovation will enhance their reputations and the value of their brand franchises. They continue to think "outside the box."

Both categories of companies start to ask new questions and to think in fresh ways about a new societal role for large corporations, a problem-solving role that is usually assigned to government or civil society. They focus on some of the unsustainable trends that are plaguing our societies, such as failure to achieve energy independence, rising health care costs and potentially disastrous climate change. Instead of seeking to profit from the problems they create without doing anything to alleviate them, they ask whether and how they can cope with them and whether, if they take a sufficiently long-term point of view, they can do so profitably. Aware of the limitations of governmental programs, they explore the constraints on their own resources and how they might work cooperatively with governments and civil society.

These companies are banking on specific products and processes. Toyota is an early exemplar. The company took big risks and may reap big rewards from its hybrid Prius models: automobiles powered by a combination of electricity and gasoline. In contrast to the consumer-unfriendly approach of taxing the price of gasoline to encourage fuel efficiency (adding hugely to the consumer's cost), Toyota has adopted a far more consumer-friendly strategy: a market approach that combines technology and entrepreneurship to enhance fuel efficiency and assist energy independence.

Procter and Gamble has carved out a similar pioneering approach to a very different problem. The company has developed an ingenious way to purify water using low-cost packets of powder (under the brand name Pr). Pr proved its social value in Sri Lanka in the aftermath of the 2004 tsunami. But its initial commercial launch lost money because the product is complicated to use and too costly for the poorest nations. The Wall Street Journal reports that when Procter and Gamble's CEO, A. G. Lafley, was given a list of the forty countries with the highest rates of infant mortality that could benefit most from its water purification methods, he committed the company to a twenty-year plan under which Pr will be introduced in two of these countries every year, starting with Haiti and Uganda, until it covers all forty. Procter and Gamble intends to make Pr a long-term commercial success as well as a humanitarian contribution.

On yet another gridlock issue, Shell, one of the fallen angels, has launched an ambitious plan to develop renewable energies to help offset the negative effects of global climate change. It is applying research and development resources to wind power and photovoltaics, partnering with conservation organizations throughout the world, providing loans to small entrepreneurs in the energy sector in Africa, and in many other ways assuming the lead in global climate change initiatives. In accepting an award from the World Environment Center, Shell's spokesman stated, "My colleagues and I are totally committed to a business strategy that generates profits while contributing to the well-being of the planet and its people."

Other fallen angels have similar opportunities to put stewardship ethics into practice. Merck has been a victim both of its own ethical cross-pressures and of the harvest of ill will that its industry has reaped. The pharmaceutical industry has gained the reputation of being unable to contain its greed in raising drug prices as high as the traffic will bear, regardless of the company's actual costs. Consumers feel trapped: they need the drugs whether or not they can afford them, and they feel that the drug companies are insensitive to their plight. The big pharma companies justify the high prices they charge by stressing the high costs of new drug research. But it has long been an open secret that much of their costs come from expensive marketing and advertising campaigns rather than from scientific research.

While Merck has a long ethical tradition and outstanding devotion to quality and public service, it has faltered in this troubled environment. It was badly wounded by a series of actions in relation to its Vioxx pain reliever. It voluntarily withdrew Vioxx from the market in 2004 after learning that trials had shown that high doses of Vioxx over extended periods of time significantly increased the threat of heart attack. Critics claim that Merck has known about this problem with Vioxx for years but had failed to act because Vioxx was one of the company's most profitable products. Merck is embroiled in a series of lawsuits charging that Vioxx, even in small doses, brings on heart attacks.

Without the ill will toward its industry and the general mistrust of business stirred up by the accounting scandals, Merck might have been given the benefit of the doubt. But instead, in the aftermath of the Vioxx withdrawal, the company was sucked into the vortex of mistrust. Its stock plunged in value, its reputation for integrity was smeared, and its future profitability is threatened by multiple lawsuits.

Let us imagine a situation in which Merck realizes that the only way it can recoup its former standing and reputation is to take some dramatic initiative. After several years of policy research and analysis, it decides to offer new ideas for reforming the patent system for drugs on the grounds that the current system inflates the price of drugs for consumers. Present patent arrangements give drug companies a monopoly for a specified number of years on the sale of drugs they have developed and tested. Developing new drugs, testing them for years and agonizing over the approval process is quite costly, especially with a faltering success rate for new drugs. In recent years, most pharmaceutical companies have found themselves without a comforting supply of new drugs in the pipeline. Quite naturally, the companies feel pressured to squeeze whatever profits they can from their few successes before their patents expire and their drugs go generic. But in our scenario Merck decides to take leadership in proposing ideas for changes in the patent and review systems in the interest of lowering drug prices for consumers.

In 2008 Merck begins to propose key changes in the patent-and-review structure of the industry. Merck takes the position that if the interests of consumers are to be safeguarded, the industry needs to reform the drug patent process so that companies are not forced to push prices ever higher during the limited period of patent protection. There is a variety of ways to reform the process; for example, the period of patent protection might be linked to the magnitude of the company's investment in developing the drug -- admittedly, the metrics would be complex, but not impossibly so. Merck argues that the industry's lack of concern with the impact of its actions on consumers generates a climate of mistrust and ill will that threatens the industry's own long-term profitability. It proposes changes that work in favor of consumers as well as the industry.

As the fallen angels and the leadership companies decide to invest in addressing difficult policy issues, their example inspires others to take similar initiatives. Developing compelling and successful models that inspire other companies is perhaps the single best way to change norms for the better. The new model begins to catch on. Companies come to realize that it is sometimes necessary to focus their long-term profitability goals on projects that make enhancing the public good an explicit objective, rather than taking it for granted as an automatic byproduct of their search for profits.

Profit with Honor : The New Stage of Market Capitalism by Daniel Yankelovich,
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BOOK DESCRIPTION FROM THE PUBLISHER

This wise and optimistic book examines the rampant scandals that plague American corporations today and shows how companies can reverse the resulting climate of mistrust. By seizing the opportunity to address some of the nation's-and the world's-most serious problems, business can strengthen its reputation for integrity and service and advance to a new stage of ethical legitimacy. Daniel Yankelovich, a social scientist and an experienced member of the corporate boardroom, describes the toxic convergence of cultural and business trends that has led inexorably to corporate scandals. Yet he offers reassurance that opportunity exists for positive change. Creative business leaders can advance market capitalism to its next stage of evolution, building upon business norms that simultaneously emphasize the legitimacy of profit making and the importance of the care that companies give to employees, customers, and the larger society.

The book asserts that American culture has abandoned its old tradition of enlightened self-interest, of "doing well by doing good." A narrow legalism has taken over ("I didn't break the law; therefore I didn't do anything wrong"). Yankelovich argues that attempts to deal with such flawed ethical norms by means of more laws and regulations cannot succeed. He offers a series of case histories to show how and why stewardship ethics can strengthen individuals, corporations, the nation, and the world economy.

Profit with Honor : The New Stage of Market Capitalism by Daniel Yankelovich,
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ABOUT THE AUTHOR

Daniel Yankelovich is chairman of Viewpoint Learning, of Public Agenda, and of DYG, Inc. He is best known for his work in the field of social values and public opinion and has served on the boards of numerous corporations, including CBS, Educational Testing Service, Meredith Publishing, Loral Space & Communications, and USWest. He is also the coeditor, with Norton Garfinkle, of Uniting America: Restoring the Vital Center to American Democracy, published by Yale University Press.

Profit with Honor : The New Stage of Market Capitalism by Daniel Yankelovich,
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BOOK REVIEWS

"Warning that trust in business cannot be restored by regulations alone, Dan Yankelovich proposes an alternative well suited to both realistic executives and concerned citizens."

-- David Mathews, Kettering Foundation

"Based on insights gained from decades of in-depth public opinion studies, Yankelovich has marshaled compelling data documenting the decline in public trust in major institutions such as government, business, medicine, and the media. In an effort to reverse this dangerous decline, he focuses on corporations that he believes must take the lead in advocating 'stewardship ethics' as the next phase in the evolution of the corporation for the well-being of both business and society."

-- Dorothy Zinberg, Harvard University

"Another brilliant diagnosis and a thoughtful, productive recommendation to deal with a major problem. This creative approach offers real potential for better corporate governance."

-- Robert A. Burnett, chairman and CEO (retired), Meredith Corporation

"As positive and perspicacious as ever, noted public intellectual Daniel Yankelovich urges American corporations to transcend the recent scandals. In crystalline prose, he argues that a higher standard of stewardship ethics will serve the interests not only of big business but also of an increasingly market-driven world."

-- Paul W. Drake, University of California, San Diego

"Executives often argue that, in a large corporation, it is impossible to be everywhere. A few bad apples, they suggest, can ruin it for all the good people. Daniel Yankelovich contradicts that false view. Once embraced, stewardship ethics effectively places the CEO and all management everywhere -- all the time. The book reviews and reveals the process -- and the key."

-- Sidney Harman, executive chairman, Harman International, and author of Mind Your Own Business

"Profit with Honor is an extraordinary book. Dan Yankelovich not only identifies the reasons why some of America's best-known corporations went wrong, but, more important, provides a road map for all corporations to help society, improve their image, and avoid the sins of the past. Must reading for all CEOs and boards of directors."

-- Jack D. Rehm, chairman (retired), Meredith Corporation

"A refreshing antidote to the Enronic plague. Profit with Honor charts a path to a restored confidence in the American business ethic."

-- Daniel Schorr, senior news analyst, National Public Radio

"Now and then a new book comes along [that is] . . . short, essential, and wise. . . . Profit with Honor is such a book."

-- Rushworth Kidder, Christian Science Monitor

"Yankelovich takes us to the future frontiers of global capitalism, showing how companies can regain the trust of society while enhancing their earnings at the same time. A short, engaging book with a very big and important idea."

-- Jeffrey E. Garten, Yale School of Management and author of The Politics of Fortune: A New Agenda for Business Leaders

"The one book that every Chairman and CEO must read this year."

-- Ged Davis, World Economic Forum

Profit with Honor : The New Stage of Market Capitalism by Daniel Yankelovich,
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