Peter Drucker's Way to the Top

by William Cohen

  NO SUCH THING AS BUSINESS ETHICS

  He resented lawmakers punishing American executives who were victimized for paying kickbacks, with politicians stating that these executives lacked business ethics. Drucker maintained that there was no such thing as ‘business ethics’, and that one was either ethical or was not. Business was not a special case. He had struggled long and hard to analyse, think through, and come to this conclusion.

  To Drucker, ethics and integrity were the bedrock of all business and personal practices. However, he recognized that there were differences in cultures and many challenges in operating from this bedrock. So, he used his talents to investigate all manner of ethics and integrity, so to identify an acceptable solution for resolving this issue. He told clients from all organizations that they could make lots of mistakes and still succeed, so long as they maintained their integrity. The clients who were able to resolve the apparent conflict between ethics and integrity and their private and business lives tended to be more successful than those who paid lip service to someone’s lofty, but maybe less attainable pronouncements and recommendations. Drucker is rightly credited with distinguishing ethics and integrity from morality and the law. He said whether hiring call girls to entertain customers was ethical or not was the wrong question. According to Drucker, this was not a question of ethics, but rather aesthetics. To wit, “Do I want to see a pimp when I look at myself in the mirror while shaving?”2

  TO GET STARTED WE NEED TO DEFINE THESE ISSUES

  The concepts of integrity, ethics, morality, obedience to the law, and even honour are closely related in many instances, but they are not the same. Drucker spoke about the need for integrity. He raised issues regarding business ethics. It is important to distinguish among these and other connected concepts. I know that I’ve overly simplified these here, but it is necessary for an understanding of Drucker’s views. Ethics is a code of values. Integrity speaks of adherence to this code of values. Morality is the quality and manner of this adherence. Drucker defined honour as demonstrable integrity and honesty, adding also that an honourable man stood by his principles.

  Drucker’s writing contained evidence of considerable concern with these concepts. What makes them particularly difficult to understand is that the unique interpretation of each concept determines what is right and good, and what is not. Drucker was acutely aware of the pronouncement often attributed to the 17th-century physicist mathematician, and philosopher Blaise Pascal’s pronouncement that “There are truths on this side of the Pyrenees which are falsehoods on the other.”

  Drucker recognized that what one culture might find acceptable or even a requirement for ethical behaviour might be totally different for another and even considered unethical. An example he used in class was the custom for corporations in Japan to reward underpaid government officials after their retirement if the corporations had benefited from the actions of these officials when they were in office. In the US, this was considered unethical and corrupt. In Japan, this was both ethical and the right thing to do.

  In brief, Drucker explained why the actions of a Japanese CEO which might be considered corruption and unlawful in the US could be regarded as an ethical duty and neither unethical nor unlawful in Japan. “In Japan,” Drucker told us, “government officials are paid very little. They could live on what they receive in retirement only with great difficulty. It is therefore expected that when they retire, companies that have benefited from their actions during their tenure will assist them, financially and otherwise. Since they could barely get by on their retirement pay, this is considered the only right and ethical thing to do.”

  Yet Drucker did not agree with so-called ‘situational ethics’ and warned against them. In other words, one did not behave one way in private life and another way in business or professional life. He also believed social responsibility to be a part of an individual’s and an organization’s ethical behaviour. But here, too, he gave examples of corporations that, seeking to do good, had caused harm to customers, the organization, and to society. He cautioned that, under certain conditions, what might normally be considered a corporation’s social responsibility should not be undertaken and could even be considered unethical behaviour from an unintended result or society’s view. Drucker’s positions on ethics and integrity might be argued, but they should be understood, for they form the basis of his ideas in dealing with customers and competitors, and in the application of all his management concepts.

  DRUCKER’S STRUGGLES

  Drucker took his examination of ethics seriously. He looked at the determination of right and wrong in questions of conduct and conscience by analysing cases that illustrated general ethical rules. This might be called cost-benefit ethics or ethics for the greater good. Essentially it means that those in power – CEOs, kings, presidents – have a higher duty if their behaviour can be argued to confer benefits on others. In other words, though it is wrong to lie, in the interests of ‘the country’ or ‘the organization’, it sometimes might be deemed acceptable according to one way of thinking. This approach carries the name of ‘casuistry’. Drucker called it “the ethics of social responsibility” and it had to do with his dislike of the term ‘business ethics’.

  During the Cold War, and 20 years after the Japanese surprise attack on Pearl Harbor, the US was determined not to be caught short by a potential enemy again. With the U-2 reconnaissance aircraft, the Soviet Union could be overflown, and sensitive nuclear sites photographed from an altitude at which the aircraft was thought to be invulnerable. However, after several years of operations, a U-2 aircraft piloted by Francis Gary Powers was shot down from its extreme altitude by an anti-aircraft missile. Before it was known that Powers had survived and had been captured, President Eisenhower publicly lied about the fact that Powers was on a spy mission. However, in a widely published Soviet trial, Powers himself appeared and confessed that this was in fact the case. Yet, I don’t think that President Eisenhower’s ethics were ever challenged on this issue. He had lied for the greater good, a higher responsibility and so most thought this acceptable. This is casuistry.3

  For the greater good, sounds very high-minded, but Drucker maintained that it was a dangerous concept to be considered, including in business, because it could easily become a tool for politicians and business leaders to justify clearly unethical behaviour. Adolf Hitler, the German dictator, had done this very thing by claiming Poland had attacked German territory when he invaded Poland, beginning World War II.

  THE ETHICS OF PRUDENCE

  After casuistry Drucker looked at prudence. To be prudent means to be careful or cautious. It has benefits, but also serious defects. When I first became an Air Force general, we were sent to complete a special two-week orientation programme. The unofficial name given to this programme by attendees was ‘charm school’. During charm school, we were given lectures and advice by senior military and civilian leaders around the country. One lecturer gave us pretty good advice in saying, “Never do anything you wouldn’t want seen on the front page of the Air Force Times.”

  Drucker gave a somewhat similar example. He said that Harry Truman, as a US senator in the early 1940s, advised senior army witnesses in the years before he became vice president to President Roosevelt that, “Generals should never do anything that needs to be explained to a Senate Committee – there is nothing one can explain to a Senate Committee.”4

  Now, the ethics of prudence may be pretty good advice for staying out of trouble, but it is not much of a basis for ethical decision-making. It doesn’t say anything about the right kind of behaviour or actions that should be taken. Also, there are sometimes decisions that a leader must take that are risky and may be difficult, or even impossible, to explain but not necessarily unethical, especially if things go wrong after the decision is made. No serving Air Force general would like to see a controversial action coupled with his or her name on the front page of the Air Force Times, or something requiring his or her appearance before a Senate s
ubcommittee. However, military decisions, and political ones too, are frequently controversial and high risk. Nevertheless, these may be the correct decisions even if results are sometimes not fully as desired. Drucker saw no basis for recommending this approach as the generalized way to come up with ethical decisions, but only noted it as a possible safeguard that his students should bear in mind.

  THE ETHICS OF PROFIT

  Drucker also thought through an approach that he called the “Ethics of Profit”. This is not what you may think. Drucker was not talking about limiting profits. Much to the contrary, Drucker wrote that it would be socially irresponsible and most certainly unethical if a business did not show a profit at least equal to the cost of capital, because failing to do so would be wasting society’s resources.5 Nor should it seek to limit its profits to a certain formula. Since decisions are inherently risky there must be a margin of additional profitability to cover losses for those that go wrong. There were other reasons, too.

  Drucker believed that the only logical rationale for the justification for profit was that it was a cost. He exhorted business leaders as follows: “Check to see if you are earning enough profit to cover the cost of capital and provide for innovation. If not, what are you going to do about it?”6

  Drucker stated that profit as an ethical measurement rested on very weak moral grounds as an incentive and could only be justified if it were a genuine cost and especially if it were the only way to maintain jobs and to grow new ones.7

  It is interesting that the rise in petrol (gas) prices in the US (prior to their dramatic fall) a few years ago prompted the following response by one refining company CEO when challenged by a Congressional investigating committee: “There is no ‘profit’. Every dollar goes into exploration or research and development and is needed to sustain this business.” If a truthful statement, Drucker would have certainly agreed with the CEO, although this would have probably been extremely difficult for someone not in the oil or petrol business, or any business for that matter, to understand or accept. It probably did not satisfy the Congressional committee, confirming Truman’s advice to testifying generals.

  CONFUCIUS WAS A GENIUS, TOO, BUT…

  Drucker felt that Confucian ethics were the most successful and most durable of them all77 although he came short of recommending Confucian ethics as the solution to all ethical issues. In Confucian ethics, the rules are the same for all, but there are different rules that vary according to five basic relationships, all based on interdependence. These five relationships are superior and subordinate; parents and child; husband and wife; oldest and youngest siblings; and friend and friend. The right behaviour in each case differs to optimize the benefits to both parties in each relationship.

  Confucian ethics demand equality of obligations on both sides, of parents to children and vice versa, and of bosses to subordinates and vice versa, for example. All have mutual obligations. Drucker pointed out that this is not always the case and is not compatible with what is considered business ethics in many countries, including the US, where one side has obligations and the other side has rights or entitlements. Though he clearly admired Confucian ethics, which he called “the ethics of interdependence”, they cannot universally be applied as business ethics, because this system deals with issues between individuals, not groups. According to Confucian ethics, only the law can handle the rights and disagreements of groups.8

  DRUCKER’S EXCEPTIONS TO LYING

  Through his stories and examples, Drucker taught his students, readers, audiences, and consulting clients what he had learned only after intensive study, analysis, and thought. However, he was sometimes criticized for the examples he used. Stories that he told occasionally misstated facts in illustrating his concepts. This was true, and if challenged, he did not deny the charge. His response invariably was, “I’m not a historian; I’m trying to make a point.” His argument was one of literary licence. It may be that his creditability suffered because of this, but he felt that these were in the same class as ‘white lies’, told for the benefit of the recipient to make the point and not the teller.

  ETHICS DECISIONS ARE FREQUENTLY BASED ON DOING THE RIGHT THING

  With ethics and the like, Drucker found an antagonist he could not easily overcome. Ethical challenges are pervasive and significant. A corporate client may pay for consulting. Does this client have a right to encourage the consultant to omit, de-emphasize, or ‘spin’ conclusions in a report and recommendations? Where does the difference between positive thinking about the future of a product, service, or business differ enough from the facts to make a statement a lie, rather than it being positive thinking in the face of adversity? Drucker’s belief seemed to be that if the speaker was forthright about the challenges faced and put his money where his mouth was by buying an appropriate amount of additional stock in the company himself or some such, then he was right to give the situation a positive interpretation. However, if he presented a bright future when faced with a threatening circumstance and then secretly unloaded his stock, that’s not only unlawful but immoral, and demonstrates a lack of integrity. How realistic or how optimistic to be gets back to doing the right thing and Drucker believed that this had to be left to individual judgement about what is and what is not the right thing.

  DISTINCTIONS AMONG WHAT IS LEGAL AND WHAT IS RIGHT, MORAL, OR ETHICAL

  Drucker made an important distinction: law may have very little to do with ethics or integrity. He made it clear that law and ethics are not the same and gave examples. Here’s one. Until the 1860s, slavery was legal in some states in the US, illegal in others. Moreover, in the Dred Scott Decision of the late 1850s, the Supreme Court ruled that no African-Americans, not even free African-Americans, could ever become citizens of the USA. According to the law, the Declaration of Independence did not apply to them, nor did the US Constitution offer them any protection. Supporting these laws did not make you unethical, and going to jail and being punished for trying to subvert these laws did not make you unethical either. So, right and wrong must be separate from the law. Support for slavery could be a legal issue, as in the Dred Scott Decision, or it could be a moral issue. Slavery was despicable, but it was not an ethical issue by most definitions of the time.

  DRUCKER VIEWED EXTORTION AND BRIBERY AS HE DID A ROBBERY

  Drucker noted that bribery was certainly undesirable from the viewpoint of the victim, from whom a bribe was extorted. The payment of bribes overseas had recently been made illegal in the US by an Act of Congress, The Foreign Corrupt Practices Act in 1977. This penalized the victim, not the perpetrator. Drucker pointed out that if someone was robbed at gunpoint, the law did not punish the victim. Not long after the law was passed, an American company, Lockheed Aircraft, was charged with bribery as a violation of the law as well as violating ‘business ethics’.

  Senior Lockheed executives had paid bribes to members of the Japanese government when money was demanded in exchange for subsidizing the purchase of the L-1011 passenger jet for All Nippon Airways. In 1976, when the bribe was discovered, Lockheed chairman Daniel Haughton, and vice chairman and president Carl Kotchian were forced to resign in disgrace although they escaped jail.9 “Lockheed has become the scapegoat for 300 companies that the S.E.C. said were doing the same thing, and Naughton [Daniel J. Naughton, who was forced to resign as chairman] and I are the scapegoats for the scapegoat,” he said.10 Yet these executives gained nothing personally from the sales of the L-1011. Why then did these two Lockheed executives commit such a stupid act?

  In the years 1972–1973, 25,000 Lockheed employees had faced a significant threat of unemployment after cutbacks in the US government order of military aircraft and missiles. Because of delays due to difficulty with the foreign supplier of the L-1011’s engines, airlines had cancelled orders for the planes. Unless a major contract to buy the L-1011 could be obtained, many jobs at Lockheed would be lost. The two executives gained not a cent in monetary or any other advantage from their submission to this act of
bribery; their violation of the new law was committed to help workers keep their jobs and, one could say, in the interests of social responsibility. Stock analysts determined that had Lockheed simply abandoned the L-1011 instead of paying the bribe, company earnings, stock price, bonuses, and stock options for these two Lockheed executives would have substantially increased.

  Almost everyone understood that because of the engine delays the L-1011 aircraft was a financial loser and nothing could be done about that. It simply could no longer make money. And, in fact, the project never made any money despite the bribe and other sales without it.

  Drucker was very clear on this: he thought it stupid for the two Lockheed executives to pay these bribes. He thought that the decision to give in to the demand and to pay them was a very poor management decision. The L-1011 project should have simply been abandoned out of good management practice. But was this a violation of business ethics as was claimed?11 Drucker noted again that the two Lockheed executives had nothing to gain and everything to lose by agreeing to pay bribes. They were victims. One doesn’t punish the victims of a robbery or any other crime. Why is this done in bribery? And why was the decision to pay the bribe considered a reflection on the executives’ business ethics rather than simply a bad management decision and a violation of the law which had been passed by Congress?