Thank you Professor Murphy. It is truly a pleasure to have the opportunity to speak with students of Notre Dame this evening. This school has a legacy of principled behaviors and outstanding contributions to humankind. It is fitting that Notre Dame's Mendoza School has one of the top programs in Business Ethics in the world, according to the Wall Street Journal list published just last week.
Introduction
The influence of Father Theodore Hesburgh is clearly evident in your curricula. He stands up for what he believes is right for humankind — whether it meant walking arm in arm with Dr. Martin Luther King, Jr. in the sixties or speaking out right now about immigration reform. In great measure his influence has helped the Mendoza School achieve such distinction. It is also the outstanding faculty and dedicated students, who comprise the total experience that sets this school apart.
Against such a backdrop, it is quite humbling to be asked to speak on the subject of integrity — as if I had some special authority or expertise. Frankly, that isn't true.
However, it has been, and I hope will continue to be, my privilege to lead the board (which, other than myself, is completely made up of independent directors) and 47,000 employees of Deere & Company — better known as John Deere. This company also has a legacy of principled behaviors, some of which I will share with you tonight. We also believe that the products and services we provide contribute to humankind — helping to feed, fuel, clothe and shelter people around the world.
As the current "chief steward" of the 169-year old John Deere, I will share a few observations with you tonight about the current business world, including:
- Perspective on recent seemingly unprincipled behaviors and what I hope can be done to further restore faith in business
- The wonderful opportunities and potential issues that are brought about by our newly "flat world."
- Finally, I will talk about the importance of leadership, as both examples and the catalysts for integrity.
What is Integrity?
First, it is probably best to define what I mean when I say "integrity." It means: "No smoke‚ no mirrors, no tricks....straight down the middle." It means no exaggerations, no dissembling; just the "real deal."
In fact, it is actually the phrase we use at John Deere to describe how we do business. It is how we deal with customers — making sure we have high-quality products and services that truly do what we say they will do. And if, by some chance, there is a problem, then we stand behind our offerings, working to get it right. Plain and simple.
This way of doing business applies throughout the company — whether we are serving our agriculture customers, major construction contractors, golf and turf care experts, or the property owner who wishes to have a lawn he or she can be proud of. This way of doing business applies whether we are doing business in Brazil or China, Australia or the United States, Germany or India — in all 130 countries where we have a presence.
The phrase defines our relationship with our shareholders — clarity, transparency and accountability are inherent in both our management and reporting. While the new rules associated with Sarbannes-Oxley legislation call for this kind of open view to the business, John Deere, GE, Verizon and many other companies have been vigilant for a very long time. Many companies have embraced SOX because they see its value for improving business further.
"No smoke, no mirrors, no tricks....straight down the middle" applies to our employees, who don't hear one thing from us internally and then read another story in the newspapers. We augment this saying within the company with the notion: "Bad news early." If something is wrong or looks like it could go wrong, it is incumbent on every Deere employee to make that clear early, so the proper resources can address any issues involved. We don't "shoot the messenger."
Integrity goes beyond just acknowledging the truth in a timely manner. W.H. Hindman, as quoted in one of Professor Murphy's recent articles, says: "Integrity is doing the right thing [even] when no one is looking."
Max DePree, former CEO of Herman Miller furniture and noted author of The Art of Leadership and Leadership Jazz, defines integrity as "a fine sense of one's obligations." He goes on to characterize integrity as the difference between gesture and commitment.
Notre Dame's own "Father Ted," who exemplifies integrity for people across the nation, once said: My basic principle is that you don't make decisions because they are easy...you make them because they're right."
The John Deere way of describing integrity — "No smoke, no mirrors, no tricks....straight down the middle" — doesn't apply only to customers, shareholders or employees. The phrase applies to how we work with our dealers, communities, suppliers, legislators, non-governmental organizations, industry associations, universities and research groups. The good thing about acting with integrity is that you can present a consistent face to all of your key audiences.
Many of you have some corporate experience. You have tested yourselves on the field of competition. You know the critical importance of passion, commitment, team work, perseverance and imagination. But without integrity — that moral compass to do what is right, not just what is expedient — these important traits lack a "bonding agent." They require integrity to make them truly adhere to business goals.
Current Corporate Environment
Recent scandals at major corporations around the world make it easy to see what can go wrong if leaders act out of mere short-term self-interest rather than principled, long-term self-interest, which then contributes to the greater good.
I don't have to detail these issues for you. Pick up any newspaper and you will see the problem clearly. Ironically, some of these companies said all the right things. For instance, how many of you have seen the Code of Conduct for Enron? How many have seen a video of Ken Lay discussing, with passion, the importance of integrity at Enron?
Then you know: On the surface, these statements are outstanding!
But unless the words become behaviors and beliefs — become inherent in the culture — they remain just words. To the extent they are inconsistent with behaviors they become poisonous words because they reek of hypocrisy! The phenomenon of having a great Code of Conduct that allows for unacceptable behaviors gets to the very heart of Max DePree's point. Integrity is not just gesture; it is commitment.
Frankly, these recent situations are very disappointing.
In part, they are disappointing because the public is losing faith in business — when in fact it is business that can help lift and keep people out of poverty by providing good jobs as well as the continuous training required to keep employees' skills and capabilities abreast with changing needs. It is business, through its taxes, that can help communities, even nations, build infrastructure and educate their populations. It is business, working with public officials, that can help create public policy that advances the human condition. But without people who believe in them, i.e., investors, employees, and legislators, businesses are hard-pressed to make the investments they need to build and grow. The ramifications of recent indiscretions and willful misdeeds run deep and hurt us all.
According to University of Chicago economics professors Rajan and Zingales, the public and its beliefs matter. In their book, Saving Capitalism from the Capitalists, they point to the anti-market reaction during the Great Depression, noting it "was made possible because the public was all too willing to believe that the market was fatally flawed." What will happen to today's free market systems if the public broadly believes the same thing?
For one thing, if that were to happen, we would lose out on promising new talent — people just like you. It might cause you or others to be turned off to careers in business. Or worse yet, potential employees might think that there are no rules…that anything goes.
History Repeats Itself
To a major extent, this aberrant behavior is nothing new to the world of business — there have always been a "few rotten apples." But in my mind, that doesn't make it any better that the behaviors have continued until today.
U.S. administrations from George Washington's onward have faced this problem. This country's first Assistant Secretary of the Treasury, William Duer — who later became a private financier and speculator — used his inside Treasury connections to speculate on bank stocks. His eventual ruin helped create the Panic of 1792 and resulted in the first Wall Street rules regulating trading.
Grant's presidency saw numerous financial scandals. He had appointed loyal friends to federal jobs, without regard to their experience or competency. His treasury secretary collected illegal taxes, his secretary of war took kickbacks for patronage jobs, and his vice president defrauded government contracts through a dummy railroad corporation called Credit Mobilier. Then there was the corrupt scheme hatched by New York financiers to artificially inflate the price of gold. When Grant realized what they were up to, he ordered the treasury to flood the market with gold to keep prices down, but the crooks had already taken their profit.
If you ever attended a U.S. high school civics class, you probably recall President Harding's Teapot Dome scandal — which began in 1921 and resulted in additional conflict of interest and disclosure rules. In 1938, shortly after 16 American oil companies were convicted for price fixing in violation of U.S. antitrust laws, President Roosevelt — FDR — appointed Thurman Arnold as his assistant attorney general of the Justice Department's antitrust division. For the next five years, Arnold revitalized antitrust law and enforcement and re-directed the focus of the New Deal from corporative-state planning to competition.
Oftentimes, the saga of history seems to get worse — not better. Societies often fail even to attempt to solve a problem once it has been perceived. For instance, until 1971, some mining companies that were closing down a mine just left it with its copper, arsenic and acid leaking out into rivers — because there were no laws requiring companies to clean up after mine closure. Even when such laws were passed, some companies extracted the valuable ore and then just declared bankruptcy before starting the clean-up.
At this point, it's fair to ask: Are we forever doomed to repeat history?
Unfortunately, we might be — if we take seriously last Thursday's Financial Times article about a Rutgers University study, which found that MBA students are the most likely to cheat of all graduate students. At least 56% of MBA students surveyed indicated that they had plagiarized or downloaded an essay from the Internet. Heaven help us if we are accepting such behavior from the future leaders of business.
Perhaps this won't apply to anyone here tonight, but if I can presume to give MBA students some advice it would be: Practice integrity in all the things you do. Even the smallest acts: Don't have someone report that you are not there when the phone rings, if you are there. Even the seemingly least important acts: Like jumping a turnstile at the train when there isn't a soul around.
Integrity is not just exhibited when convenient; it must become habitual. Make integrity a trait for which you are known. I strongly believe that history does not have to repeat itself.
Restoring Faith in Business
Now is the time for Saving Capitalism from the Capitalists, as Rajan and Zingales suggest in their book title. These authors believe that, and I quote: "The greatest danger for the market democracy today is… suppressing competition under the excuse of reducing risk." They recognize a role for government in developing appropriate infrastructure that allows markets to work efficiently. They caution against a hands-off policy that ultimately could limit access to a privileged few.
On an intuitive level, you can appreciate that incumbents are far less likely to push for a truly competitive environment. It is much harder to do business in a competitive environment. This is not a new thought. In the mid-1700's Adam Smith made the observation that capitalists are the most likely to collude. A few of today's incumbents may still prefer to stack the deck, keep things cozy, protect their own self-interests — rather than earn their strong positions in a free market....Rather than allow the forces of fair competition on a level playing field to decide the winners.
Undoubtedly, the recent scandals have led to growing distrust of corporations and financial markets, which has spawned political activism. This, in turn, could jeopardize the delicate balance of the free market system, negatively impacting everyone. Vibrant, trusted markets foster innovation, spread opportunity, fight poverty and keep alive the process of "creative destruction." That means businesses are continually challenged and if they don't adapt, they are replaced by new, better ones.
If the response to scandals becomes a set of increased regulatory restraints, businesses can be put at a distinct disadvantage. An already fragile free-market system becomes even more vulnerable. Rajan and Zingales caution, as do I, that today all businesses should pay much greater heed to the delicate balance of the free market/regulatory environment, be eternally vigilant against complacency and "closed clubs," and carefully work to build greater trust, transparency and expanded competition.
We must bend over backwards to ensure we not only say the right things, but we do the right things.
I firmly believe that most businesses are solid and well-managed. The majority of people who work in these companies are dedicated and competent. The lack of integrity of a few has made it difficult for anyone in business to be trusted.
Somehow, word needs to get out that many companies are well run by people with high integrity. But don't just take this statement from me as gospel. People just like you need to question people like me. Learn what you can about individual companies — how they are managed, their behaviors and results. Find out for yourself that the state of business is not as bleak as some would have you believe. That kind of inquisitive and demanding mindset can help to further restore faith in the world of business.
Integrity is Fundamental
I would like to think that integrity is fundamental to everything else at John Deere. We are guided by our core values of integrity, quality, innovation and commitment. We strive to live our values and, by doing so, build a business as great as our products.
We trace our company's commitment to integrity to our founder. In 1837 John Deere, a transplanted Vermont blacksmith, used American ingenuity to forge a special plow from a discarded saw blade that made it possible to cut through the Midwest's tough sod. It gave farmers the confidence to tackle the Great Plains, to sow crops, and eventually create one of the world's major breadbaskets.
John Deere built a company that would live up to his personal creed: "I will not put my name on a product that does not have in it the best that is in me." This single sentence has remained our steadfast mission to this day.
But now, instead of operating in a small Midwestern river valley, Deere does business in more than 130 countries, including manufacturing and support facilities in the growth areas of China, India, Russia and Brazil. Within that far-reaching footprint, our long-standing values remain in place.
As only the eighth CEO in the company's 169-year history, I feel privileged to be the current leader of John Deere. As such I must be a steward of the business and personally accountable for its legacy. It is my obligation, along with my 47,000 colleagues, to make sure that when the company celebrates its 200 th birthday — 31 years from now — it is a stronger, even better company.
Challenges of Flat World
There are many challenges to sustaining this legacy. With the "flattening" of the globe, with an explosion of new-found consumer wealth, with competitors required to run faster in order to stay in place — it may seem that the rules are changing. Many companies face similar questions as those facing Deere today:
- Are we going to be able to accomplish enduring growth and operational performance while maintaining our integrity?
- Do we have to change how we do business in order to be successful in different cultures and geographies?
- Are we trying to impose capitalist values universally?
At Deere, we've concluded that we can and will remain true to our values. Our conduct guidelines will have to be very clear — transparent — to our employees, customers, and suppliers wherever we do business. We will have to explain the rules by which we are willing to play. We believe we can accomplish "integrity with performance." While not perfect, the conduct guidelines were developed with input from people around the world. We have put together well-tested training materials that bring the points out clearly, without misunderstandings.
Let me share a brief example of what I mean about integrity in the exploding economies of the world:
Recently one of John Deere's business presidents was visiting in another country, where we were opening a new sales office. It was also a chance to meet with a very important administrator and customer. A formal meeting was arranged, with a row of chairs on either side of the room, headed by two almost throne-like seats at the front for the meeting's highest ranking dignitaries. Typically these two individuals speak to one another (sometimes with interpreters seated behind them), with the "supporting staff" looking on. In this case, our president and the head of this administrative agency were seated in beautiful fan-back chairs and talking about the Deere/Government relationship.
The dignitary indicated that "Deere could have more business from his agency if we were more flexible." The nuance was quite clear: This individual was suggesting we pay a monetary tribute to him for influence.
The Deere president smiled politely and replied: "We can be very flexible; if by 'flexible' you mean we will ensure you have the very best technologies available to increase the productivity of your farms and that our service will be outstanding." The dignitary quickly changed the subject, recognizing that we were not going to accede to his wishes.
Our employees understand that after we have exhausted all efforts to win business legitimately, we will walk away. We cannot gain business in inappropriate ways. More often than not, the customer, or perhaps a supplier, values the relationship and the products and services enough to modify his or her approach. This is "doing the right thing, even when no one is looking."
Today, our flattened world is seeing new businesses launched in countries where the rule of law also is new. To participate in a world economy — to be a WTO member country — rules must be applied uniformly, fairly. It will take time for these developing economies to appreciate the value of things like intellectual property rights protection or penalties for under-the-table payments — but those adjustments will come.
Obligations of Leaders
Capitalist business leaders have an obligation to focus on building honesty, moral courage and trust; placing a premium on ethical employee behavior; and communicating clearly with employees. Recent reports of exposed corporate scams and attempts to escape from corporate responsibility remind us that lessons never learned are taught again and again. To break the cycle, greater commitment and focus must be brought to elevating ethical contributions to business strategy and execution worldwide.
To be successful on a global basis brings us back to integrity:
It is the glue binding all long-term successful business conduct worldwide. Managers who lead with integrity — who follow the rules of ethical engagement — who avoid the trap of self-deception and public embarrassment — will — over the long run — be more likely to advance their businesses and the lives of all who depend on those businesses.
Those who demonstrate the moral courage and intellectual honesty to lead — not follow; to spot new trends and shifting circumstances early — will be in a position to adjust quickly, respond wisely and retain a competitive advantage.
On this planet of 6 billion-plus people, where approximately one-third go to bed hungry every night, the need for our respective work is clear and the deadline couldn't be more urgent. The world population is projected to increase by almost 2 billion — to more than 8 billion people by the year 2025. Vigorous economic growth and greater globalization are seemingly inevitable. Economist Milton Friedman notes: "Today, it is possible to produce product anywhere, using resources from anywhere, by a company located anywhere to be sold anywhere."
John Deere is a global company — from supplier sourcing, to manufacturing processes, to recruiting highly skilled men and women from around the world. Today, we ship combines made in East Moline, Illinois, to Russia; Chinese combines to the Middle East; Brazilian combines to Europe; and
German and Indian tractors to the U.S. To be competitive, our tractors in Augusta, Georgia, are assembled mainly with parts from 12 other countries. In Waterloo, Iowa, one of every four tractors produced there is exported to any one of more than 110 countries on six continents.
So now back to Max DePree's definition of integrity as "a fine sense of one's obligations." We — like many other companies — appreciate the obligation we have to serve this flat world in ways that cause a win-win-win-win for consumers, employees, investors and our communities. One way to help ensure forward progress is for businesses to engage legislators in the development of effective public policies. Another important way is to establish fair compensation systems.
Let me take these one at a time.
Sound Public Policy
First, helping to create effective public policies:
No doubt you have felt the pinch at the gas pump the last few months. While things have eased a bit right now, it is likely that it is only a matter of time before the price per gallon creeps back up. So, suddenly, public attention on alternative fuel sources has sky-rocketed.
In a situation like this, it is essential that businesses work responsibly with legislators to develop and enact appropriate public policies. We need some basic standards — environmental and performance. You can't expect to take the bacon grease off your stove and run it in your car....at least not if you want your car to last a long time! We need educational institutions who will train people and research new technologies. Ultimately, competition should occur without subsidies.
John Deere, for instance, is actively involved in organizations such as "25 x 25," whose mission is to ensure that by the year 2025 at least 25 percent of U.S. fuel is from alternative sources. We are working with legislators, universities and research groups to understand the trends and help our customers take advantage of them. That is our obligation.
Like many other companies, we work with legislators to help them appreciate the complexity of issues they are being asked to address. Senators and Congressmen come to Washington with specialties, but rarely are their backgrounds so eclectic that they can know as much as they need to when they are framing policy. Like many other companies, we work where we believe our interests are aligned with sound public policies — where our expertise is most appropriate, or where our fate is most affected.
Fair Compensation Systems
The second key way I mentioned for businesses to create a win-win-win-win in this flat world is to establish fair compensation systems. Earlier this month, New York Times columnist David Brooks wrote of "The Populist Myths of Income Inequality." He argues against those holding the belief that "…corporate profits soar, while job insecurity skyrockets. CEOs get absurd salaries while the 99 percent of earners enjoy few benefits from productivity gains. Unions are weakened while manufacturing wages tumble and the middle class suffers." Brooks points to statistics that indicate:
- Middle and line workers are not getting a smaller slice of the pie. Wages and benefits are the same share of GDP for the past 50 years.
- Outsourcing is responsible for less than a 2 percent job loss; however, it has contributed a higher percent of jobs in the U.S. as developing countries' need for U.S. products and services increase.
- There has been no real decline in ability for American workers to hold jobs for a long period (i.e., 20 years).
Hopefully, based on educational excellence and employee productivity, we can actually do better than the last 50 years. A significant challenge, but one to which we aspire.
Brooks acknowledges that real financial growth is occurring among the "relative few who have the skills to transform organizations from the top." You've no doubt heard a great deal lately about incredible pay packages that some CEOs have received — yet their companies have not performed well. When this is indeed the case, this kind of "disconnect" does cause legitimate, and unfortunately, massive distrust of business.
Boards around the world, must bend over backwards to ensure that compensation plans are tightly tied to performance. They must do everything possible to eliminate cronyism in their practices. Especially at the CEO level, but also at significantly lower levels, pay should be heavily variable and linked to delivered performance. The harder the task, the more sophisticated the knowledge and skills, the more complexity involved, the higher the strategic value, the greater the achievements — the greater the tie should be of compensation to sustained performance.
Responsible companies, led by responsible boards, have a sense of obligation, of integrity, in devising their compensation systems and making sure they fairly reward great performance with appropriately great rewards — at all levels in the company.
Where does John Deere stand on this issue?
We have a highly admired global performance management system, directly aligned with our compensation systems and with company business objectives. This consistent approach has helped the company achieve a shift in the collective mindset of our employee and management group toward exceptional operating performance, disciplined growth and aligned high-performance teamwork. Salaried employees now follow detailed performance plans — geared to their own responsibilities and development potential — and reflecting the goals of each business unit and the overall company.
All salaried employees share in the short-term incentive program tied to performance — which has paid out handsomely in the past few years. Higher level employees also have the opportunity to share in a mid-term incentive program based on multi-year company performance. Even our wage employees have special productivity targets that allow them to gain when the company's productivity improves. And yes, my compensation is based on delivered, sustained performance.
Trust Ties to Integrity
Again, the obligation to create fair compensation systems ties to integrity. No business gets done without trust. There's no trust without integrity. Integrity comes first and sets the stage for everything that follows. I would like to believe that at Deere operating with integrity is never a question and it's not negotiable. Integrity acknowledges challenges, spots problems fast and calls the question, and demands solutions.
That sometimes involves sacrifice — short-term pain for long-term gain. A leader's first duty is to define reality — no matter how uncomfortable it is to hear it and have to deal with it. DePree said: "The goal of thinking hard about leadership is not to produce great or charismatic or well-known leaders. The measure of leadership is not the quality of the head, but the tone of the body. The signs of outstanding leadership appear primarily among the followers. Are the followers reaching their potential? Are they learning? Serving? Do they achieve the required results? Do they change with grace? Manage conflict?"
You've heard it said that the tone for a company's ethical culture is set at the top. That's why I'm always reassured when I hear someone such as General Electric's Jeff Immelt emphasize: "There's nothing on earth that is worth sacrificing your own personal integrity or the integrity of the company [for]."
A leader must become a servant and a debtor. DePree stressed that leadership is a concept of owing certain things to the organization. It's an obligation to discern far ahead, to plan for institutional heirs, and to think in terms of stewardship as contrasted with ownership. Leaders with integrity feel obligated to leave behind them assets and a legacy. They feel compelled to provide and maintain momentum. They feel responsible for effectiveness. And they feel it their duty to help develop, express and defend civility and values.
Much of John Deere's growth in the 21 st century will come from countries where the laws may be vastly different than in the U.S. Regardless of the local culture, the John Deere culture of integrity and compliance must prevail in a consistent manner. Peoples' right to privacy must be respected regardless of where they live. Labor conditions must be safe and appropriate for every location. Suppliers and local management must clearly understand what it means to operate with integrity and ethics — and know that severe consequences will result if those standards are not followed.
Stakes Never Higher
Managing a large company in a complex world — the stakes have never been higher. A reputation that takes decades to build can be destroyed in less than a minute. Integrity must permeate every aspect of corporate governance. Compliance is imperative. But merely being "safe" is not a sufficient condition for success.
To be competitive, companies must embrace risk for the innovations and opportunities it affords — while minimizing it through a willingness to take the extra steps necessary to ensure compliance. Everyone has setbacks. Babe Ruth hit 714 home runs over his 22-year career, but also struck out 1,330 times. Every misstep, if improved upon, is an opportunity for growth.
Because every public company's CEO must sign off on the quarterly financial statements in order to comply with Sarbanes-Oxley, internal audit functions have experienced dramatic change. While this Act has transformed procedures and responsibilities at almost every level of organizations, and may have far-reaching impact on how business is conducted for decades to come, few can argue with the law's intent:
To reduce fraud, bring reliability to financial reporting, and restore public confidence. No one likes more regulation. But I do recognize its benefits — applying the process control discipline we use in our factories to financial statements. The bottom line is that investors should demand high standards of governance and great performance. Sarbanes-Oxley is a price that U.S. business is paying to restore investor trust.
If we have a "fine sense of our obligations," business can — as it delivers long-term, sustained performance — contribute to human flourishing. If we do what we say we will do — no smoke, no mirrors, no tricks…straight down the middle....we can help restore faith in free markets.
If we act out of principled, long-term self-interest rather than mere short-term self-interest, we can contribute to the greater good and we can all leave the world better for our being here than when we entered it.
Let me leave you with that challenge and hope that you take it up.
THANK YOU! |
