Many prefer to leave the question of what a business-person ought and ought not to do in particular situations to the philosophy and legal departments. A question more reflecting (1) a cost-benefit analysis based on the odds of getting caught in certain scenarios or (2) the effectiveness of particular decision controls, would seem more relevant to Corporate Finance.
Many students enter MBA programs specifically to enhance their professional skills through highly-technical courses delving into complex subjects. A course in portfolio theory that focused more on good and evil than on risk and reward would be strange. Yet this wall of separation between ethics education and business training has not matured the profession as a global institution. We have advanced intellectually in marvelous ways but remain stuck in an adolescent mindset about human nature and character.
Experience over the years has revealed the danger of bifurcating professional/business decisions and personal ethical considerations. Barings, Enron, Tyco, Worldcom, Arthur Anderson, Qwest, the NBA: all incredibly sophisticated business models, run by incredibly intelligent business people, and all reduced to embarrassing or bankrupt conditions by ethical misconduct. Fundamental priorities were lacking. Why didn’t ethical considerations have a more natural and integrated place in these organizations?
The most effective people and organizations know how to set and keep sound priorities in their business decision-making and other facets of their life. They recognize, learn, practice, and keep their priorities straight!
Keep your priorities straight. That commonly used phrase might sound simple, or even simplistic, to a group of experienced MBA students, and yet, properly understood, its power as a guide for making decisions is proven repeatedly in difficult circumstances and under intense pressure.
Priority Thinking is a reality-based approach to improving professional decision-making, building character in employees, and increasing an organization’s capacity for sustained high performance within a coherent ethical framework of thinking.
You can tell a lot about people by their priorities, by how they allot their money and apportion their time. In a real way, what and how we prioritize defines us ethically and professionally. If we have good priorities, we usually end up in a good place in business or life. If we have poor priorities, or violate the priorities we know we should practice, we tend to experience problems, setbacks, and often profound regrets that reveal themselves as “wake up calls.” Whatever the case, priorities serve a fundamental purpose for us personally and professionally: they act as a means of finding or achieving direction in our lives.
A principle is a starting point, a point from which something proceeds.
A priority is a principle upon which something else depends for existence or action. 3
For example, a triangle is a geometrical figure with three vertices (corners) and three straight lines. The point is the principle unit of the triangle, the foundation upon which the triangle is constructed. Two points enable a line, and three lines enable a triangle. Thus, at least two priorities exist to establishing a triangle: (1) the point and (2) the line.
Milton Friedman once wrote that the priority of a business is to increase profits. 4 Whether Friedman is correct that increasing profits is a business’s first priority is arguable. Not arguable, however, is that making a profit is a business priority. Making a profit is not a priority because businesspersons are greedy. It is a priority because the health of a business depends upon growth. Organizations, like their members, thrive by growing. Growing is an essential part of the being of a business, its natural opposition to death (otherwise known as bankruptcy).
Just as the point is the necessary condition for the line, and the line is the necessary condition for the triangle, some necessary conditions appear to exist even for turning a profit or creating shareholder value.
Human beings simultaneously practice three types of priorities in each decision we make:
Day-to-Day or Tactical Priorities order the urgent tasks of the day. We practice these priorities in relation to our immediate circumstances, which force us to make quick decisions in the present. Usually external forces impose their will on us to affect the priority.
Strategic Priorities order those activities or initiatives that take more time to develop and require focus over an extended period of time. We practice these priorities daily in relation to some life or business plan, or overarching vision of our personal and professional purpose. Strategic priorities tend to be self-defined according to opportunities we seek in our personal life, the broader market, and the competition we face.
Core Priorities order the fundamental elements of our lives individually and as members of organizations. We practice these priorities in relation to those activities embedded in our individual hard-wiring and touch our very nature as human beings or organizations. These priorities chiefly relate to ends, not purposes; they flow from personal or organizational necessity, not from deliberate choice or individual hopes and dreams. Just as a triangle cannot exist without the priority of point and line, we cannot exist and function correctly as persons or organizations without acknowledging and aligning ourselves to core priorities. For organizations, core priorities are foundational to creating unity within and amongst diverse cultures, particularly for multi-national firms.
Core priorities have a unique relation to risk. The vocabulary of risk is embedded in the operation of modern capital markets and value/wealth creation. Risk assessment is an essential skill for any business leader. He or she must be able to discern the reality of the situation, the possibilities and probabilities, the effects of these scenarios and then make a prudent decision. Ultimately, the decision reflects the cumulative assessment of risk and a bet is placed; that is the nature of risk.
Portfolio theory offers us a way to minimize the risk and maximize the return on these bets along an efficient frontier. Win or lose, if you as a business leader fail to take the bets you are supposed to take, then you are likely not cut out for leading in the business world. In fact, your failure to take the right kinds of risk can be an ethical problem as well, but that topic is for another discussion. The ethics of risk for modern corporate leaders almost always involves the fiduciary responsibility of “other people’s money” either in the equity provided through investors or the credit provided through the bond markets.
These are edgy times in the financial markets. The recent collapse of the Bear Stearns hedge fund has left investors holding mortgage-backed securities with a value less than $0.12 on the dollar. Wall Street has lost faith in these types of securities. A pretty bad bet appears to have played out. Now the bond markets are so rattled that even safe bets, bets the market should be taking, are being left on the table. Why did this bet go so bad so fast? Was it simply due to placing our money on the wrong horse? Or, to a violation of core priorities to which investors had assumed a business was adhering: fraud prevention, loan quality, accurate FICO scores, and so on?
There is another kind of bet that we introduce in Priority Thinking: “bets against reality.” These kinds of bets involve more than just risk, they are, in fact, an ethical failure to understand or accept reality. And, within that failure is the practical truth that business leaders must come to understand about real ethics. Win or lose, the bet does not change the ethical dimension. Violating a core priority is always a losing ethical bet. We might not get caught fudging documents or violating a law; we might get lucky and not injure a customer because of the faulty design of our product that we had suspected and did not correct; we might have benefited for having “turned a blind eye” toward the questionable methods of a high-producer sales employee. In the short run we might not have harmed our profit & loss statement or required a significant accrual on the balance sheet. But, in the long-run, the odds are against us; we will lose the bet if we do not get our core priorities straight.
Core priorities have a singular dimension that distinguishes them from other types of priorities. When people or organizations violate a core priority, they make a “bet against reality.” The person or organization placing the bet seeks the benefits of a lower core priority while hoping that the higher core priority will not demand payment for being ignored. Every time you speed in excess of the speed limit, only to be slowed down by an accident ahead, you know you won your bet against reality—for now— while someone else has lost the bet and is paying for it with his or her life or limb.
The problem of priorities is never simply a question of time. The challenge of priorities is always a question of thought and will. Our thinking rules over the time we have and how we choose to use it. Our capacity intellectually to “reflect” is a direct function of our willingness to think. Time is a necessary condition for our prioritizing because it is the necessary condition of our thinking and choosing. If we had infinite time, we would have little need for temporal priorities. But because our time is limited, time itself is one of our highest priorities. We must think about how we use it.
This struggle plays out as we seek alignment, the preservation of a direct connection among the three types of priorities we practice. Regardless of the specifics of the situation, we have essentially two choices: (1) an action in alignment with our tactical, strategic and core priorities, or (2) an action inconsistent with one or all of these types of priorities. Priority Thinking is all about helping individuals and organizations to recognize and keep their core priorities straight, regardless of the personal or professional context, so that they can focus better on their tactical and strategic priorities.
Four basic rules help to insure that the understanding and practice of Priority Thinking works in everyday life. (1) leaders must not only know but practice the priorities; (2) all the priorities within each priority set must be practiced; (3) one core priority can not be claimed as an excuse for not practicing another core priority; and (4) the incentives within each organization should never violate core priorities. In fact, these incentives should enable them.
A fundamental structure at work in Priority Thinking rests in understanding core priorities that enable rightly ordered thinking and sound ethical action. The priority of “what” over “how” is a good starting point to see the core priorities at work. Both priorities are important. In Priority Thinking, “what” always holds the priority over “how” in our path of inquiry. As a result, “what” comes before “how” in essential importance. On average, we will spend considerably more time focusing on “how” we do things than on “what” we decide to do. Getting things done depends on recognizing this importance. The priority to “what” determines to a large extent our direction and use of the time we spend on the “how.”
Choosing the wrong “whats” can have major implications. Hence, our ability to see priorities as the right “whats” is crucial. Priorities are essentially about “what” we intend to focus our time and resources on. The “how” comes in many forms and approaches. When organizations focus on the wrong “whats,” they have the wrong priorities, waste precious time, and, as a result, jeopardize the mission for which the organization exists.
When a business adopts an approach of winning while paying mostly lip-service to real priorities, a disease infects the organization’s culture. Recognizing the right priorities is hardly a guarantee for executing on the priority. But failing to do so is a recipe for eventual disaster. We can recognize and choose the right “what” and fail to execute the “how.” Having the right priorities takes knowing the right “what” and executing the right “how.”
Human beings care much about winning. We also care deeply about how we win. The reaction to Barry Bonds as he passed Hank Aaron’s homerun record is one example.
Another is Michael Rasmussen, who was carrying the yellow jersey during the Tour de France. He was booted by his own team for lying and steroid use because they understood what was at stake: preserving the art of bicycling and the chief reason that the Tour de France exists.
A final example is Elliot Spitzer. The former hard-charging attorney general for the state of New York and now its new governor has significantly damaged his reputation early in his first term because he pursued “winning” (increasing power) over adhering to basic principles of good politics and justice (rightly-related principle). The Wall Street Journal reported that Spitzer’s own advisors warned him “that his ‘take no prisoners’ tone against his opponents could lead some underlings to ‘misconstrue’ his goal to win.”
When Spitzer told one of his Republican opponents that “I’m a f------ steamroller, and I’ll roll over you and anybody else” it’s bound to be more difficult for him to “do the people’s business.” Memories are long in politics (and in business). Behavior modification alone will not be enough for Spitzer to salvage his
reputation. Rightly-related principles give life to power. When we make power, in the sense of “pushing people around,” a priority over using the correct principle, we weaken the legitimate power we seek because, as Socrates recognized centuries ago, legitimate power comes from being right. Nothing is weaker and more miserable than a fool who gets what he wants.
Most people generally respond well to principle-based leadership if the principle rightly relates to the subject to be evaluated or regulated, because they see the leader seeking to get things done in the right way. Using chemical principles to evaluate theology is as foolish as using theological principles to evaluate chemistry. Both methods proceed in the wrong way, involve misuse of principles. When we see a leader getting it right with respect to the fundamentals, the principles, we tend to have no problem getting along with the leader because our common sense tell us that he or she is competent.
Governor Spitzer failed to recognize that he was no longer attorney general. As governor he has to use principles of governing proper to the governor, not to the attorney general. Now, Spitzer vows to “try hard to play hard on the field and be friends during the game.” Caught in a place he usually put others, Spitzer has correctly recognized his error that winning did not mean turning his opponents into his enemies. But knowing the right priority does not mean we will do the right priority. Restoring the core priority of rightly-related principle over power will require the new Governor of New York to spend a lot more time improving his political relationships before he can advance his agenda.
Many of us are familiar with Niccoló Machiavelli’s famous defense that “the end justifies the means.” Ethicists often quote this statement as derivative of utilitarian and immoral behavior used to justify any action. In Priority Thinking, the sequence or order flows that one must first define one’s ends and then choose the means. If we justify any means to achieve our ends (including bad means) then the ethical problems become obvious.
Marcus Tullius Cicero offered that the “ends” in fact do justify the “means” if the “means” are rightly ordered or principle based. Understanding the right priorities at work helps you to see reality more clearly and to employ the right means.
Excerpted from: “Getting it Right and Getting Along”- by Peter Charles DeMarco
3. Application of the work of Peter Redpath, Ph.D., Research Fellow at the Institute 4 Priority Thinking, and Full Professor of Philosophy at St. John’s University (NY).
4. Paraphrase of Friedman’s thesis in his famous article, “The Social Responsibility of a Business is to Increase Profits.” The New York Times Magazine, September 13, 1970.