Use the Three Pillars for Business Decisions

Okay, let’s now look at the Three Pillars as they apply to business decision making. My first practical exposure to the Three Pillars occurred a few years ago when I was a visiting professor at Harvard Business School. And I participated on the teaching committee of a course called Leadership, Values, and Decision Making. And this course gradually evolved into a course called Leadership and Corporate Accountability which, In my opinion, is the most important course in the Harvard MBA program. This course is required of all Harvard MBA students, and has a very practical focus according to my friend Professor Lynn Paine. The focus is on “decisions the students will have to make in their careers”.

And the course material states that “outstanding managers develop plans of action that fall in a ‘sweet spot’ at the intersection of their economic, legal, and ethical responsibilities”. And at Harvard they call this sweet spot the “zone of sustainability”. As you can see from this diagram, the Harvard model brings the Three Pillars together so that there’s overlap among the Economic, Legal, and Ethical Pillars creating this sweet spot the zone of sustainability in the center. Another way to think about the Harvard model is this Decision Tree developed by a friend of mine Connie Bagley who’s currently at Yale. But she taught at Harvard for several years, at the Harvard Business School.

And under this Decision Tree, your first decision, represented by a box, is to ask yourself, is your decision legal or not. And then if it’s legal, consider the economics of the decision. Does it create value or not. And if it creates value, then is the decision ethical or not? Now I’ve revised Connie’s Decision Tree a little bit to come up with this version of it. But, one thing to consider, and we’ll be talking about this later in the course. What if your decision is legal but it does not create value as you define value creation? And many people define it as creating value for shareholders.

Even in that case, you might want to proceed, and make a decision that doesn’t create value for your shareholders. And we call this often corporate social responsibility. Sometimes a company will make a decision that benefits society even though, arguably, it does not benefit shareholders. So, this is again just a Decision Tree version of the Harvard model. Now, I have decided to expand the Harvard Model by changing the Economics Pillar to a Strategy Pillar. And a couple reasons for this. First of all, strategy includes economics. But strategy is a broader field that includes other business functions and disciplines. And second, I like to use a strategy pillar because it relates to all types of decisions.

It relates to personal decisions where you’re not considering economic value necessarily. It relates to leadership decisions such as President Obama’s decision. It relates to decisions by non-profit organizations. So that’s the reason in this course we talk about a Strategy Pillar rather than an Economics Pillar. But strategy includes economics and in a business context it includes value creation. So these are the Three Pillars of Decision Making with the revision that Economics has been changed to Strategy. Now let’s look at these three pillars in a little more detail. First of all the Strategy Pillar. The focus of strategy on a very general level is to determine your goals and how to implement them.

And one of the key strategic goals that corporate strategists talk about and emphasize is value creation. And in talking about value creation, at least in the US, and some other economies, there’s something called the Shareholder Primacy Theory, which basically means that shareholder value creation is the most important. You want to create value for your shareholders. They have primacy over other stakeholders. A stakeholder, by the way, if you’re not familiar with the term, is somebody who has a stake in the business. But even people who follow Shareholder Primacy theory admit that other stakeholders are also important, if not for anything else at least to achieve shareholder primacy.

And as we will be talking about later, these shareholders are especially, customers, employees and government. The Law Pillar, in business, the Law Pillar is especially important because it provides the framework for business operations and decision making. Law, in effect, represents the rules of the game of business. And the Law Pillar is very important globally, whenever you make a decision to invest in another country. Probably the very first question you’re going to ask is, does it follow the rule of law? Or if it doesn’t follow the rule of law, am I going to be subject to the arbitrary decisions of whoever is in power?

The Law Pillar is very important for all types of businesses, ranging from the largest companies in the world to somebody who’s starting her own business. For example, if you’re starting your business as an entrepreneur you have to understand the various forms of business as you form your organization. The legal aspects of financing a business. The legal aspects of hiring employees. Contracting with customers, contracting with suppliers, producing safe products, and complying with government regulations. And the focus of the Law Pillar, and we’ll say more about this later, is on managing risk. That is, preventing liability.

And, finally, the Ethics Pillar. The Ethics Pillar focuses on whether conduct is right or wrong. In business, the emphasis of ethics is on values creation. Beyond value creation under strategy, values creation through ethical leadership. And in this course later on, we’re going to talk very specifically about how you as a leader can create values within your organization. Beyond your business, when your company is engaged in an unethical conduct, it can have a ripple effect that goes far beyond the company. It can affect customers, suppliers, the economy, the industry you’re in and other stakeholders. For example, in late 2015, VW was involved in emissions testing scandal. And almost immediately the share price plunged, affecting the shareholders.

VW customers who had purchased VW cars lost resale value of their cars. Suppliers lost business, employees lost jobs. Germany lost an estimated trillions in brand value. Before this happened made in Germany was a very valuable brand, and that has been diminished somewhat because of the VW scandal. And then finally, the diesel industry has taken a hit. And so it isn’t just your company that’s affected by unethical conduct. It is a wide variety of stakeholders. So that concludes our look at the Three Pillars and in the next segment we’re going to look at the big challenge with three-pillar thinking as it applies to business. And that’s the gap between strategy and law.