Profit Isn’t Everything, But It’s the Final Score

منبع: https://www.qualitydigest.com/inside/lean-column/profit-isnt-everything-its-final-score-050824.html

Note that Ford actually cited the concept of “social justice,” but in the context of a fair day’s pay for a fair day’s work. Nowhere did he cite any obligation for his supply chain to provide money to anybody or anything that did not contribute to it. That money is not the supply chain’s to give away; it belongs to the suppliers, customers, workers, and investors. However, workers and investors are free to donate portions of their own wages and dividends to whatever causes they want.

1. Organizations are not free to reduce costs by cutting corners on worker safety. Unsafe workplaces are incompatible not only with federal regulations but also the Code of Ethics of the National Society of Professional Engineers (NSPE). The Occupational Health and Safety Administration (OSHA) doesn’t throw yellow flags, but it can impose serious financial penalties on those who violate its regulations.

Even if OSHA does not regulate, for example, secondhand tobacco smoke, workers might still be able to sue their employers or others for harm caused by this known hazard. New Jersey casino workers are suing their state’s government over this issue, according to an article in the American Journal of Public Health. In addition, “Employers have been held liable for employee exposure to secondhand smoke in numerous cases, including those based on workers’ compensation, state and federal disability law, and the duty to provide a safe workplace.”

2. Organizations are not free to discharge pollutants into the air, waterways, groundwater, or landfills. The Environmental Protection Agency (EPA) can assess expensive penalties against those that do.

4. Organizations are equally free to give their customers as little value as possible, e.g. through “shrinkflation,” but they cannot expect the customers in question to be loyal. This is a reminder that relevant interested parties include not only investors but also suppliers, workers, and customers.

In light of numerous corporate disasters related to environment, social, and governance (ESG) metrics, somebody needs to step up and point out the hard facts. 1) Profit, in terms of fiduciary duty to investors, is possibly the only score that counts; and 2) profit, like scores in sports, must be earned in accordance with the rules. These rules include not only compliance with laws and regulations, but also natural laws of human behavior requiring a square deal for all stakeholders, including customers, suppliers, workers, and investors.

ESG and net-zero goals are far from blameless. Electric vehicle incentives and mandates have increased cobalt mining in the Congo, where artisanal miners labor under conditions that appear to be a combination of the worst practices of Belgium’s King Leopold II and the mine bosses in the movie about the Molly Maguires. As noted by NPR, “People are working in subhuman, grinding, degrading conditions. They use pickaxes, shovels, and stretches of rebar to hack and scrounge at the earth in trenches and pits and tunnels to gather cobalt and feed it up the formal supply chain.” The fact that these mines are not subject to OSHA’s jurisdiction does not make these practices ethical or socially responsible.

Frederick the Great once warned, “Those generals who have had but little experience attempt to protect every point, while those who are better acquainted with their profession, having only the capital object in view, guard against a decisive blow, and acquiesce in small misfortunes to avoid greater.”

Remember that only the final score counts, and SVB had to face what losing teams call “the long ride home.” There was nothing socially responsible about wiping out their investors, laying off their employees, and becoming a burden on the Federal Deposit Insurance Corporation (FDIC). Other ESG failures include FTX, whose former head Sam Bankman-Fried was recently sentenced to prison for defrauding investors despite FTX’s moderate ESG risk rating. George Calhoun wrote in Forbes, “Sloppy and likely illegal management practices at FTX… also cast doubt on the integrity of the ESG rating business, and on several other components of the larger financial system.” PR Newswire meanwhile reports of Bed, Bath & Beyond, “Commits to being a Top 10 retail employer by 2030, donating $1 billion in product by 2030, and becoming net zero by 2040.” That company beat the net-zero goal by 17 years, having gone carbon neutral (as in out of business) in 2023, although I read that it was bought up by Overstock.com.

Silicon Valley Bank, on the other hand, had a lot of ESG metrics, few of which supported the capital object of making money with which to compensate investors, pay employees, and have enough liquidity to protect depositors. Among these were diversity, equity, and inclusion (DEI) training, DEI hiring goals, charitable contributions, and carbon neutral operations by 2025. They beat the latter goal by a couple of years because they are now indeed carbon neutral, the same way the gambler in the Kenny Rogers song finally “broke even” (i.e., died in his sleep). “Following the collapse of Silicon Valley Bank, two faculty at Auburn’s Harbert College of Business argue that while blame is being cast, there is the risk of missing out on a critical opportunity to address the systemic failure of the environmental, social, and governance, or ESG, ideals and practices SVB so proudly professed to advance.” A University of Chicago Business Law Review article adds, “Arguing that ESG investing is not a breach of fiduciary duty becomes more difficult when factoring the financial returns of ESG products. A 2019 University of Chicago study of 20,000 mutual funds found that ‘none of the high sustainability funds outperformed any of the lowest rated funds.’”

3. Good coaches take care of their players. Penn State’s Joe Paterno insisted that his players go to their classes, so they actually had a higher graduation rate than the university’s general population. While Paterno wanted to win, he would not do so at the expense of having a player fail to graduate and be unable to find a good job if he couldn’t get into a professional football league. While organizations are similarly free to pay their workers as little as possible, as long as it’s no less than minimum wage, they should not expect buy-in, loyalty, or commitment from the workers in question. If we take care of our workers, they will take care of us.

Comply with EPA regulations, and exceed them when it is economically feasible to recover, reuse, recycle, and repurpose waste, regardless of whether there are environmental aspects. Don’t waste money on net zero or carbon neutrality goals, but use ISO 50001:2018 to eliminate energy wastes that raise prices, reduce wages, reduce profits, and also generate unnecessary carbon emissions. Exceed OSHA requirements, and ISO 45001:2018 will help with this to ensure worker safety, improve morale, and reduce workers compensation premiums. Give customers a square deal for their money to keep them coming back for more.

The famous football coach Vince Lombardi purportedly said that “Winning isn’t everything; it’s the only thing.” (According to Bartlett’s Familiar Quotations, in a 1962 interview Lombardi said, “Winning isn’t everything, but wanting to win is.”)

Henry Ford said of his operations, “…everything and everybody must produce or get out.” Anything that does not support the ultimate objective of earning profits along with the revenues necessary to pay relevant interested parties such as workers and suppliers does not belong in the supply chain. This includes nice-sounding “social justice” and ESG goals. The best way to achieve social justice is to pay workers fair wages they can spend in their communities. Ford’s industries abolished poverty wherever they appeared for exactly this reason.

We have seen so far, then, that while profit is indeed the final score, it must be earned within the constraints of legislative, regulatory, and natural rules. Most people realize that playing by the rules, whether it’s in a sport or business, delivers better results than trying to circumvent them. Safe workplaces aren’t just the law—they are productive workplaces with better morale, fewer lost work time incidents, and lower worker’s compensation premiums. When we give our workers and customers as much rather than as little as we can, they reciprocate with loyalty and commitment.

Coach Frederick the Great vs. Coach ESG, Silicon Valley Bank

You must be in business to be socially responsible, which includes paying employees, suppliers, and investors.

What we need to do

Another way to say this is that extraneous ESG metrics that divert attention from the only metric that counts in the end are likely to result in failure to meet not only our business goals but also our ESG goals. “People, planet, and profits” sounds like a nice phrase, but we cannot take care of our people unless we make a consistent profit. If we pursue nice-sounding but dysfunctional management fads, we will end up wiping out our investors, not serving our customers or paying our suppliers, and putting our workers on unemployment. None of these is socially responsible.

We must win by the rules

Meanwhile, DEI is well past its “use by” date, assuming it ever had one. Equal opportunity is both the law and common sense; there is no place in our society for discrimination against anybody’s EEOC-protected characteristics. If the job requires logic and some people with green blood and pointed ears from Star Trek’s planet Vulcan show up, beam them on down and put them on the payroll. The observation that companies with diverse leadership perform better may, in fact, confuse cause with effect. If we select the most qualified people, we will often, by necessity, get a more diverse selection of candidates with varied backgrounds and experiences.

This principle helped transform Ford’s business from a private garage in which he built one automobile (and then purportedly had to remove part of the garage because he could not get it out) into a continent-spanning enterprise while helping to make the United States the wealthiest and most powerful nation on earth. When organizations attempt to give their customers as little value as possible for their money, the customers leave and don’t come back.

If a football team violates the rules, it gets a penalty that makes it harder to achieve the only metric that counts, namely, the final score. A false start will cost the team five yards, and unsportsmanlike conduct is a 15-yard penalty. I am not sure, by the way, why ice hockey players insist on fighting when a stay in the penalty box means their team must then play a man short. Football and hockey must be played by the rules; profit must be earned similarly by the rules. These rules include not only government-enforced laws and regulations, but also self-enforcing laws of natural human behavior. As examples:

I remember taking some people to a local restaurant in the 1990s, where we got children’s portions for very high adult prices. I am sure the restaurant saved some money by skimping on ingredients, but we never went back there.

A square deal for all stakeholders

On the other hand, if we try to exceed the EPA’s regulations by reusing, recycling, or repurposing everything we might otherwise throw away, including materials that are not environmental aspects, we can actually make a lot of money. Henry Ford viewed anything he threw away, whether slag from blast furnaces that could be made into cement, or waste wood that could be distilled into wood chemicals and Kingsford charcoal, as wasted money. This supports the “planet” aspect of people, planet, and profits, and indeed adds to the revenues we can share with workers and investors.

An organization in which this happens is easy prey for a competitor such as one run by Henry Ford, who made it clear that the workers must share the benefits. In My Life and Work (Doubleday, Page & Co., 1922), Ford writes, “It ought to be the employer’s ambition, as leader, to pay better wages than any similar line of business, and it ought to be the workman’s ambition to make this possible…. If an employer urges men to do their best, and the men learn after a while that their best does not bring any reward, then they naturally drop back into ‘getting by.’ But if they see the fruits of hard work in their pay envelope—proof that harder work means higher pay—then also they begin to learn that they are a part of the business, and that its success depends on them and their success depends on it…. Exact social justice flows only out of honest work. The man who contributes much should take away much. Therefore no element of charity is present in the paying of wages.”

When organizations subordinate the interests of their stakeholders to profit, the consequences are generally self-enforcing and often catastrophic. Frederick Winslow Taylor told us more than 100 years ago, “… after a workman has had the price per piece of the work he is doing lowered two or three times as a result of his having worked harder and increased his output, he is likely entirely to lose sight of his employer’s side of the case and become imbued with a grim determination to have no more cuts if soldiering can prevent it.” Soldiering, or marking time, means workers deliberately limit their productivity and do only what they are told, and the latter often only when their supervisor is watching them.