Transparency and consequences can be powerful leadership deterrents. For the board and CEO and their personal brands, the critical question is, what will key decision-makers in their organization do in situations when no one is watching?
When the subject of ethical and responsible business behavior arises, Warren Buffett advises managers to evaluate every action they take — and not just by legal standards, but also by what he calls the “newspaper test.” When managers have any doubt about whether a decision or action is right or wrong, they should imagine how they would feel if it were reported the following day in the local newspaper, with the assumption that the write-up is authored by a smart but unfriendly reporter and read by the manager’s family, friends and neighbors. Buffett’s bottom line: If your decision or action passes this test, it’s OK; if it doesn’t, it’s not.
This test isn’t just about transparency. It’s also about consequences, as illustrated by another well-known Buffett quote: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
The test itself is not a morality play. It’s more about the reality of losing one’s legacy and the specter of permanent damage to one’s personal brand. That reality alone makes the Buffett test one of preserving and sustaining reputation and the right to play.
We frequently see examples of individuals failing the Buffett test, such as using sales practices that deviate from a company’s core values; cutting corners on safety to reduce costs, accelerate speed to market or generate more revenue; installing software to defeat environmental emissions tests; leveraging one’s professional stature to sexually harass a subordinate; circumventing established internal controls to engage in fraud; and using offensive, racist language for years in personal emails. These are but a few examples and, whether those involved are C-level executives, rainmakers, industry luminaries or rank-and-file employees, eventually, the chickens come home to roost. Exposure is inevitable.
Given discovery is just a matter of time, there are many reasons why smart people fail the test. For those who aspire to act ethically and responsibly, decision-making processes are the ultimate reflection of how corporate values manifest themselves into action. For boards and their CEOs, this conversation is about preserving their personal brands and recognizing that their respective legacies are inextricably tied to the corporate brand itself. Thus, for the company’s leaders, incorporating the Buffett test into the thinking of decision-makers is a reputation play.
Below are three actionable steps for boards to consider:
Ultimately, the CEO and board own the responsibility to protect the enterprise’s reputation. Their task: Encourage key decision-makers across the company to engage in ethical and responsible business behavior consistent with the organization’s core values. That task revolves around laying out the “sandbox” within which decision-makers function based on applicable laws and regulations, and internal policies. That entails articulating boundaries, which include:
- The risks the organization is willing to accept (e.g., risks inherent in the strategy).
- The risks the organization intends to avoid at all costs (e.g., operating in countries with high corruption risk, making extreme market bets, and exposing the public to health and safety risks).
- The strategic, operational and financial parameters expressed as targets, ranges, floors or ceilings, which provide a context for establishing risk tolerances and limit structures.
Yes, it’s important to be aggressive in pursuing entrepreneurial opportunities, but it’s also crucial to clarify the parameters around those pursuits. Performance incentives are a critical component of creating this clarity. Extreme financial incentives should be avoided.
This discussion is not about morality. It’s about focusing employees on what the company stands for and having the necessary plumbing in place to reinforce expected behaviors. Periodic training can be helpful, but it only builds awareness of the importance of ethical and responsible business behavior. The above suggestions can help instill buy-in and ultimately lead to ownership. A commitment to do what is right strengthens the commitment to the company and its brand promise.
For more about the Buffett newspaper test, read the article here.
(Board Perspectives — Issue 146)