CHAPTER 10

The Responsibility of a Corporation First, Do No Harm

Drucker summarized what he expected from the leader with primum non nocere; in plain English, “above all, do no harm.” Drucker was only partly correct in his description of the origin of this cautionary instruction, but his conclusion is so important that it requires a separate discussion.

Hippocrates was a physician born in 460 B.C. on the Greek island of Kos. As Peter Drucker is known as the “Father of Modern Management,” Hippocrates is known as the “Father of Medicine.” In the ancient world (at least the known Western civilization), Hippocrates was regarded as the greatest physician of his day. In the same manner that Drucker looked at a business, Hippocrates looked at a patient and based his diagnoses on his observations. This was a breakthrough at the time. Hippocrates rejected the accepted views of his age that attributed illness to evil spirits or the disfavor of the gods. Drucker shared other things in common with Hippocrates. Hippocrates believed that the body must be looked at as a whole and not as individual parts to be analyzed, diagnosed, and treated separately. He observed symptoms and was the first to accurately describe and catalog indications of various illnesses. He developed the Oath of Medical Ethics, now known as the Hippocratic Oath, which is still affirmed by most new physicians as they begin practicing Western medicine. It is said to be one of the oldest binding documents in history. According to the American Medical Association, the Oath “has remained in Western civilization as an expression of ideal conduct for the physician.”

The Hippocratic Oath and Primum Non Nocere

It is interesting to note that the statement “above all, do no harm,” is not in the Hippocratic Oath. About the closest one comes to it are the words. “I will apply dietetic measures for the benefit of the sick according to my ability and judgment; I will keep them from harm and injustice.”¹ There is a great deal of controversy about the origins of the phrase, “above all, do no harm,” but there is a signifi cant connection to Hippocrates because a close approximation of the phrase can be found in the Hippocratic Corpus: “to help, or at least to do no harm,” which comes from Hippocrates’ Epidemics or Of the Epidemics.²

Accordingly, we can forgive Drucker this slight inaccuracy since it is the concept primum non nocere, and not the text from which it is drawn, that is important. Hippocrates was cautioning the physician to consider the possible harm that any intervention might do the patient. Drucker expands this, in essence cautioning the leader to consider the possible harm that any action taken might cause the mission, the organization, its members, or society. Moreover, he considers this should be the ultimate guide for the leader in ethical conduct in business.

A simple reading of Drucker’s advice may give the impression that following it is easy; this is not so. Frequently, well intentioned acts of leaders can do precisely what Hippocrates and Drucker cautioned against, harm. The harm done can be much greater than the good originally sought. For this reason, leaders must incorporate primum non nocere in their overall plan of ethics.

Ensuring No Harm Is Done

There are several ways that leaders can, with the best of intentions, cause harm to the organizations or others and fall into this ethical trap. Most start with the best of intentions: to make some situation better through a positive action. In many cases, the focus of the leader or leaders is so much on the one good intention that the system is not considered as a whole. In other words, the focus is on a part instead of the whole; as a result, “the part” may be better, but the solution may have a negative effect on the whole; that is, the organization, its members, or society.

Moreover, as noted, Drucker taught that good intentions were not in themselves socially responsible. When social responsibilities are undertaken that hurt the organization’s ability to accomplish its mission, the resulting harm is the reverse of social responsibility. Even more serious, when organizations ignore this concept and take actions intending to improve a condition, frequently a social condition, they are not absolved from responsibility for whatever unintended negative impacts may ensue.

Pollution from motor vehicles has received a lot of attention over the last thirty years. Despite this, you will see some quiet modification of the strict policies in coming years despite the cry for even more strict control. To eliminate, or reduce, pollution, both states and the U.S. government passed laws limiting auto emissions. The average pollution emitted by an American car manufactured since 2000 is only about 10 percent of that emitted by a car manufactured in the 1960s.³ Yet we have more pollution from automobiles than ever before. According to the Sierra Club, technological improvements to reduce emissions have mostly been offset by the increase in number of cars on the road, the number of inefficient light trucks and sport utility vehicles, and the number of miles driven each day.

This is partly true. However, this explanation ignores another important factor in the system. The use of pollution-emission reduction devices on automobiles has a negative effect on fuel economy. Therefore, a car driven the same number of miles burns additional fuel per mile to do so. Therefore, for a given number of miles, more fuel must be produced. This, in turn, requires that more oil be refined for this car to drive the same number of miles. Oil refining is a much greater potential source of pollution than automobile operation. Therefore, unless pollution that comes from refining is also reduced, more pollution will result for this car to drive the same number of miles. It’s all part of the body or system.

Unintended consequences resulting from good ethical intentions are frequently negative and counterproductive if the results are not thought through using a primum non nocere criterion. Various aspects of the U.S. welfare system as it developed are another example of unintended consequences, as described in Chapter Nine.

Look Before Leaping

In the 1990s, the United States was in the midst of the quality revolution, which had some good results—and quite a few bad ones. In the enthusiasm for the new “revolutionary” focus where the emphasis was on the process and not on the outcome, some leaders violated every principle of management and leadership learned over the past seven thousand years and eagerly followed consultants who certainly knew less than they did.

A division of a major corporation surprised several thousand employees when they came to work one morning. Without warning employees were instructed to climb aboard waiting buses, which took them several miles away to a large aircraft hangar. No one except those behind this action had any idea of what was going on.

On arrival, the employees were disembarked, gathered together, and told that they were fired. However, if they wished (I repeat these words tongue in cheek) they could reapply if they could justify their work position or restructure it such that it was justified to upper management.

On the advice of consultants and human resource personnel, the company shut down for the day while the entire organization went through this rather bizarre exercise. I think the idea was to raise the productivity and the understanding of each member’s contribution, to determine where everyone fit, eliminate useless jobs, and maybe unproductive people. However, I was told by participants that it was a madhouse and little other than chaos and insecurity resulted.

The consultants had a preconceived template of how things should be, and the newly designed jobs were structured according to the template. Fortunately, the workers were less gullible and more practical than the company’s leaders and managed to work around the crazy quilt organization that resulted after this day of spirited but confusing activity. Eventually things drifted back to normal, although the shutdown, its effect on morale, and working around the Frankenstein monster that the shutdown created probably cost the company a bundle in productivity.

Did the company’s CEO intend to create such a mess? Of course not. He was an intelligent leader who wanted to establish his organization in the forefront of the new total quality movement. However, in failing to look closely at what the “experts” were advising, he didn’t follow Drucker or Hippocrates and ended up with unintended consequences. He sought to do good, but definitely caused harm. He probably forgot, or didn’t know, another of Drucker’s insights: Reorganization is always major surgery and attempted only as a last resort.

Never Change for the Good Without First Considering the Future

Any leader, taking any action, assumes the responsibility for the outcome. No leader in any organization is exempt. Drucker’s favorite example of this was a Union Carbide plant built with the very best of intentions.

Union Carbide, one of the oldest chemical and polymers companies in the United States, has been a wholly owned subsidiary of the Dow Chemical Company since 2001. The company came out of World War II with a strong reputation for developing raw materials for the chemical and metals industries that helped win the war. Expanding its capabilities and concerned with its social responsibilities, in 1951 Union Carbide decided to locate one of its new plants in a depressed area where unemployment was a major social problem.

After a search for a suitable location that needed Union Carbide’s help, the president’s staff thought they found exactly the right place, the small town of Vienna in West Virginia. For various reasons, the area was not economically suited for manufacturing. Nevertheless, Union Carbide opened one of its most advanced state of the art plants in a small isolated town and instantly created two thousand to twenty five hundred new jobs. It even installed the latest anti pollution equipment, which trapped 75 percent of the ash from its smokestacks, at a time when trapping 50 percent was the best anyone else could achieve. Union Carbide received a lot of good publicity and it was considered a corporate hero when the plant opened. However, its accomplishment was not appreciated for very long. Ten years later, the country had become much more aware of the dangers of pollution. A new mayor was elected on an anti pollution platform. Everyone knew whom he was attacking. There was only one company in the area, thus the only pollution came from the Union Carbide plant.

Union Carbide, hurt and amazed, fought back. What was the matter with these guys, anyway? Didn’t they know that the only reason that Union Carbide came to the area was to do a good deed and to create twenty five hundred jobs in a totally depressed area? Union Carbide defended itself vigorously, but pollution had become a popular cause and the company soon found itself at war with the state government, the federal government, the environmentalists, and the media.

All this, and the plant was barely economical! Its good intentions were pursued at considerable cost to the company. It certainly never set out to pollute and had even used the very latest anti pollution equipment when it built the plant. It made little difference. The federal government made threats, and Union Carbide received little support from anyone, including those in the town who had previously benefited. The fight dragged on. Even the usually friendly business media did not support Union Carbide. Business Week published an article in February 1971 titled, “A Corporate Polluter Learns the Hard Way.”

In frustration and probably some feelings of retaliation Union Carbide announced that the plant would have to be closed as it could not be brought up to environmental standards and remain economically feasible. Union Carbide couldn’t win that way either. Union Carbide was heavily criticized for this decision also. Not only was it a polluter, it didn’t care about its employees! Public opinion forced Union Carbide to keep the plant open at great cost and no profit.

Drucker concluded that Union Carbide could have avoided many of its problems by simply accepting responsibility when pollution became an important factor, but primarily that the plant should never have been built in the first place. Its location made it certain that any plant built in the area would be uneconomical.⁴ The leaders forgot the basic rule of ethics, the one that has no time limit: above all, do no harm.

The Great Housing Depression

As the housing problems of 2007 deepened into crisis in 2008, fingers pointed in all directions. Rooted in the mid 1990s and the goal of making home ownership open to all Americans, key laws were changed and the government, in the name of this good intention, encouraged the mortgage industry to lower lending standards. As a part of this effort, the U.S. Department of Housing and Urban Development formulated policies that fueled the trends toward issuing increasingly risky loans, and directed government sponsored enterprises that at least 42 percent of the mortgages they purchased should be issued to borrowers whose household income was below the median in their area.

Meanwhile, the economy and housing prices continued to expand. Laws were further loosened, permitting and even encouraging borrowing for homes based not so much on what the prospective homeowners could afford as on how much they could borrow. These practices also encouraged investors to borrow money and, whenever and wherever possible, to purchase multiple properties in order to make money in a market that appeared certain. In nine years, subprime loans rose by 1000 percent.

It was always assumed that a bank cares about whether the loans it makes are repaid, and therefore it would carefully screen potential borrowers. In the 1970s and 1980s, this was in fact the case. The bank that originated a mortgage usually held it for the long term and derived income from interest plus from repayment of the principal. As a result, banks created only those mortgages that were likely to be repaid. However, once the goal of having a greater percentage of Americans become homeowners was attained, various riskier financial innovations—mortgage-backed securities—were developed and permitted that changed this basic principle. For example, mortgages could be broken into component parts so that the principal could be separated from the interest, and the components packaged into securities related only by common characteristics, such as maturity or perceived risk, that could be sold in the financial markets. These caused a number of results that should have been seen as potentially harmful, but were not. High yields in a time of low interest rates were very attractive to Wall Street and these mortgage backed securities developed quickly into a large market. Nothing wrong with that—except that many banks and specialized mortgage companies no longer held the mortgages they originated. Their main source of revenue was the origination fee, not the repayment of mortgage principal and interest as had been true in the past. As a result, lenders were not concerned about repayment; they were out to make as many of these loans possible under the much more lenient laws that permitted this. The potentially harmful results of these changes should have been foreseen, but were not.

Very good intentions created a toxic mix of incentives, which led to real harm when the bubble burst. If one interjects human greed, which easily clouds judgment when “everybody’s doing it,” a major disaster was simply waiting to occur. On one side, borrowers were encouraged to borrow and to purchase far more than they could afford. It seemed that they would even make money on these deals as housing prices went higher and higher. The lenders were encouraged to approve as many mortgages as possible since the market was so heated that they would be able to sell the mortgages in these packages before any repayment problems arose, even for clearly risky borrowers. At the same time, increasingly less regulated financial controls made it easy for borrowers, lenders, and financial investment institutions to profit—at least on paper—until everything came crashing down. Above all, do no harm!⁵

Drucker on Doing No Harm

• Good intentions don’t count for anything.

• Beware of unintended consequences.

• Look before you leap, especially when the concepts are new and the ideas untested.

• Not doing harm counts in the future, too.