A Harvard Business School Professor, award-winning author, and economist Clayton Christensen says sticking to your principles every single time makes business sense and may even save you from devastating losses in the long run. In fact, by ignoring your principles, even for just one time, may cause irreparable harm.
In this video, I explore the business value of principles, why people should stay true to their principles, and what happens when they stray away.
Do profits and principles make sense together? Looking back to decades of accounting scandals, fast fashion sweatshops, and hazardous working conditions in big, profitable corporations, the news would lead you to believe that you must ignore sound and honourable principles to get ahead of business.
One company has been steadfast about upholding its principles in business. That is Patagonia. They have proven through decades that you can remain profitable while staying true to their principles. They are currently valued at US$3 billion and bring in US$100 million in annual revenue. I discussed Patagonia’s business extensively in a previous video. Please click on this link if you are interested to learn more about Patagonia.
If Patagonia has shown that a principled business strategy can be profitable, why don’t others follow suit? Or, put differently, why would some principled businesses turn to questionable tactics? Why would they consider deviating from their principles?
In economics, there’s a concept that says rational individuals consider the small differences when making decisions. This means they weigh the immediate costs and benefits of their choices. For example, if a decision seems to have more benefits than drawbacks, even if it goes against one’s principles, the principle suggests that a rational person would likely choose it. They might justify it by thinking it’s just a minor deviation from their principles and question, what harm does it really do?
Christensen explains that by using this logic, a person is using one principle of economics that states the a rational people think in the margins. What this means is that people think about and compare short-term costs vis-à-vis benefits of a choice. So if one choice, despite it being unprincipled, is shown to have benefits outweighing costs, the economic principle says that any rational person would make that choice. Perhaps one would rationalise that it is a very small, even inconsequential deviation to one’s principles.
But who are you harming? Besides, you are doing this just one time. No one is harmed. What’s wrong with that?
Does this thought process sound familiar?
The problem is that we don’t usually stop with just this once. Just this once can lead to another, and then another, and then another. Before we know it, we are habitually making bad choices.
That’s exactly what happened to Enron. Enron was an energy company and considered one of the largest companies in the United States during the early 2000s. It also went down in history as the company that perpetuated the largest accounting frauds.
In the 1990s, it was named “America’s Most Innovative Company” by Fortune for six consecutive years. The pressure to stay on top ultimately led to its demise. Records would later show that Enron was increasingly losing money, but “creative” accounting tactics, such as special purpose vehicles, were used to cover these losses. Investigation showed that Enron had inflated its income by around US$586 million since 1997.
At its peak, Enron’s shares were trading at US$90.56 in 2000. In 2001, its shares were down to US$0.26 before it filed for bankruptcy. One small unprincipled choice led to another, and then another, and then another, until it became too big and too consequential an error to hide. Enron stopped its operations in 2007, becoming an American corporate lesson on being careful when things look too good to be true.
Patagonia would have likely earned more if they used cheaper material or if they did not spend millions of dollars on research and development to make more environmentally-friendly products. If they did, they wouldn’t be staying true to their mission: “We’re in the business to save our home planet.”
It’s tempting to make short-term profitable choices. However, there are long term consequences to unprincipled choices. Enron has shown that one wrong turn can ignite an avalanche of poor choices. Conversely, Patagonia has shown that consistently making the principled choice can be very profitable.
So what choice will you make in your business today?
