The Ethics of Profitability
Glenn Gutek, Senior Practice Advisor
On many occasions I am asked, “Who is your target audience?” My simple quip is, “The reluctant entrepreneurial lawyer.” The response will generate a follow up question that allows me to share the quote from Michael Gerber: “Most small businesses in America are not started by entrepreneurs, but technicians that have an entrepreneurial seizure.”
Downsizing will thrust many into starting their own firm. Other inspirations for start-ups include disillusionment, out-sourcing and my favorite is the professionally trained technician that can only master their craft by starting a practice. The primary concern for these reluctant lawyers is capturing their first customer or client and making a living. Many, if not most, have not had any formal business training and often view profit in the same light as greed. Today I want to look at the importance of factoring profitability into your practice and even considering it as an ethical imperative.
Could Greed Be Ethical?
Oliver Stone gave us the iconic figure of Gordon Gekko in the film Wall Street. One of the most oft-quoted lines from the film is “Greed is good.” Gekko completes the thought with “…greed is right, greed works!” The character, masterfully played by Michael Douglas, takes one of the seven deadly vices and turns it into a virtue. At first glance there is wisdom to be gleaned by the ambitious and money hungry success of “Gekko the great.”
A reluctant entrepreneurial lawyer whose only ambition is to eek out a living from their practice is prone to mismanage their enterprise. They will overpay, under manage, make wasteful expenditures, and at times take the path of least resistance. When a practice is poorly managed it will under serve its clients, lower standards of professionalism and never create new value. Vision is a powerful force in any law firm, and one that is too small has tragic consequences.
The most common tragedy stemming from a limited vision of long-term profitability that I witness is what I call “the slow coast to the finish line.” If the reluctant entrepreneurial lawyer is pre-occupied with revenue generation over profitability they will time the life expectancy of the firm with their own leadership life-cycle. The lawyer concludes, “When I go away, the practice will go away.” As the lawyer is coasting to the finish line they fail to take into account changes in the marketplace, new client service opportunities and ways to create lasting profits. Economic upheaval can strike, traffic patterns can move, new marketing practices are established and the timing of the coast is greatly miscalculated. Far too many formerly successful firms die a pre-mature death because the vision was not big enough. Could greed be good?
Why Greed is Not Ethical
The Gordon Gekko of baseball is George Steinbrenner, owner of the New York Yankees. If you are a Yankee fan you love him, and if you are a fan of any other team you worry about George destroying the game of baseball. His greed for World Series titles prompts him to outspend all of his competition so that he can claim the best player in baseball for every position. Baseball does not employ the same measures as other sports that keep small market teams competitive with big market teams. The risk here is that the Yankees may spend so much, become so much better, and win so often that sooner or later, nobody will care about the game and the paying customer will go away. Unabated greed will eventually turn on itself and cause you to lose the very thing you are greedy about.
Herbert Hoover was a successful entrepreneur, the former Secretary of Commerce; the Presidency was the only elected position he ever held. One of his more interesting quotes before the stock market crash of 1929 and the beginning of the great depression was “the biggest threat to capitalism is the capitalist.” Hoover knew at some point the logic of Gordon Gekko that “greed works” fails to be true.
It is sad to drive around my upper middle class suburb and see so many vacant store fronts and partially erected homes. We have a brand new street where an exciting development was envisioned but is now barren because the economy receded. An arguably simplistic answer for the cause of this poor economy could be that greed did not work. We experienced a growing economy without any real value creation. Recently, Thomas Friedman – the man who fired the imagination of world business with his book The World is Flat — wrote in his New York Times column: “We don’t just need a financial bailout; we need an ethical bailout. We need to re-establish the core balance between our markets, ethics.”
Ethics Lead To Profits
Thus far I have attempted to make a complex argument that profitability is necessary for a law practice to be healthy. Lawyers cannot simply try to generate revenue. They must design a firm that yields a healthy profit. However, profitability without ethical restraint will eventually turn on itself and destroy the business. We must stop the shallow thinking that creating an ethical practice is an expense and profit killer and understand that ethics leads to long term profitability.
In the November 2006 issues of the Journal of Business and Economic Research, Robert McMurrian, a professor at the University of Tampa, cites that organizations that invest in the ethical soul of a business produce customer trust. McMurrian states, “In fact, a reputation for ethical business activities can be a major source of competitive advantage. High standards of organizational ethics can contribute to profitability by reducing the cost of business transactions, building a foundation of trust with stakeholders, contributing to an internal environment of successful teamwork, and maintaining social capital that is part of an organization’s market-place image.”
Other researchers highlight that long-term profitability is linked to the correlation of three factors: (1) customer loyalty and profit; (2) employee loyalty and customer loyalty; and (3) employee satisfaction and customer satisfaction. All three of these factors are connected to the ethical behavior of creating value, sustaining profits, treating people fairly and providing a culture that invites people to stay.
A Call to Ethical Entrepreneurial Leadership
Our clients know we have a passion for the art of leadership and the impact it has in a firm. This year we have a slightly larger vision. We want contribute to the advancement of ethical leadership. This is not a departure from our core; we have always been devoted to helping our clients increase their profitability through effective leadership. This year we would love to play a part in helping lawyers understand that personal ethics improves leadership, leadership improves the ethical behavior of the firm, and the ethics of the firm leads to long-term profits, ultimately resulting in wealth creation.
The 2009 National Business Ethics Survey reveals that we may have made some progress in the past year. There was marked improvement in a variety of areas of ethical behavior. However, such improvement is consistent with previous turns in the economy. How ironic that we become more ethical when our economy is floundering. Just like the “tech bubble” and the “real estate bubble” we may be experiencing an “ethical bubble.” If that bubble bursts, it will kill your profits.
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