While this might be a plot synopsis for one of the fictional HBR case studies I’ve written, it is the very real situation that confronts the executives at Apple. While the issues of overworked employees and lax environmental standards are not unique to Apple, they may be the brand with the most to lose. Apple has subsequently stepped up its efforts to monitor suppliers and is inviting third party verification of standards.

In a recent post for BecomeALeader.org, I used this tension between the needs of stakeholders as the jumping off point for a broader question for all leaders: where would you draw the line between values and financial performance? The post is below. I look forward to your thoughts.

Just a few months ago Steve Jobs was being lauded as one of the great CEOs of all time. I was a bit more reserved in my praise because I think it’s important to evaluate leaders on their legacy as well as their performance while in the job. Recently Apple was back in the news both for its stellar profits and the allegedly abhorent labor practices of the subcontractor that assembles many of its devices.

This juxtaposition presents an excellent opportunity to ask yourself the question: how far will you go to deliver financial performance?

First, a bit of background in case you missed these stories. Apple had a bang-up fourth quarter in 2011 selling 37 million iPhones and more than 15 million iPads. We love these products (full disclosure: I treasure my iPad but I am having second thoughts about an upcoming iPhone purchase). Apple’s profits for the quarter doubled over the previous year. Wall Street could not have been more jubilant:

“It almost defies words in terms of the strength across all products,” Toni Sacconaghi, an analyst at Sanford C. Bernstein & Company told the New York Times. “Everything about it eclipsed even the wildest expectations of analysts.”

Then came news of a darker side of our love affair with all things Apple. Following on earlier reporting of worker suicides at China-based Foxconn, a major supplier to Apple and other electronics makers, the New York Times published a major exposé on labor conditions in the plants from which our sleek, sexy devices emerge. It was not a pretty picture. The article described “harsh conditions” with problems ranging from “onerous work environments and serious—sometimes deadly—safety problems”:

“Employees work excessive overtime, in some cases seven days a week, and live in crowded dorms. Some say they stand so long that their legs swell until they can hardly walk. Under-age workers have helped build Apple’s products, and the company’s suppliers have improperly disposed of hazardous waste and falsified records, according to company reports and advocacy groups that, within China, are often considered reliable, independent monitors.”

Does this sound like a job you would take? Would you encourage your son or daughter to apply for a summer job on the assembly line? I doubt it. These are conditions that would not be tolerated in the United States or many other places around the globe. Yet lines form around the block whenever a new Apple product is released.

A critical leadership tension is brought into high relief: some of the hottest, most profitable products on the planet come from factories in which Apple would not want its customers walking around. This from a company whose “Think Different” advertising campaign featured human rights champion Mahatma Gandhi and labor leader Cesar Chavez.

I frame the larger leadership question in terms of clarity in three areas: purpose, values, and performance. I call this the PVP framework.

Purpose comprises two questions: What job is your customer hiring you to do? What are you trying to build? Your Values are the answer to the question: How will you conduct your activities? Performance also comprises two questions: How viable is your business model? How you will measure success?

I believe that the PVP framework can be applied to any organization whether it is for profit, nonprofit, or even a government agency. Every organization should have a clear purpose and values. Every organization needs to be financially sustainable. The challenge is that while most organizations have myriad processes for measuring and monitoring performance, they are less rigorous around purpose and values. Each needs equal attention.

I think that the case can be made that Apple’s leadership maintained greater clarity around purpose than its competitors. The company clearly delights its customers and elicits extraordinary loyalty from them. None of its competitors has been able to match the cachet of its products. The performance numbers above speak for themselves. They demonstrate that the organization is clear about its business model and executes well.

The wrinkle here is values. Perhaps Apple executives have made their peace with the labor conditions at Foxconn and other suppliers. Customers are clamoring for our products, one could imagine these executives saying to themselves—isn’t our job to make those customers happy? If improving labor conditions would add to the cost of an iPad, far fewer would be likely to sell, the logic would continue. That would wipe the smiles off the delirious investors who pushed the stock over $450 per share, which would, in turn, cut into the executives’ compensation.

What would you do? Your customers are not demanding changes. People are much more interested in when you’ll release the next iPhone. Your investors want you to keep doing what you are doing. The New York Times story didn’t cause a blip in the share price. Perhaps the public won’t care that much—Chinese workers are a world away and the newspaper stories are soon forgotten.

I am not writing this to provide an answer; my hope is to stimulate a discussion. As a leader, you have to be prepared for your situation to change in a heartbeat. Just ask the executives at the Susan G. Komen Foundation who experienced a furious values-driven backlash when they recently decided to stop funding Planned Parenthood. The best preparation for that moment is to be clear about your values from the beginnnig and use them to guide transparent decision making.

The question is on the table: if you were in charge at Apple, what would you do?

Your thoughts and comments are encouraged!

A greatly simplified view: Extraction, like mining, focuses on finding and capturing value and then moving on to do it all over again. Cultivation, like farming, seeks to harvest value in a way that makes it possible to replant and harvest again from the same land. Extraction has a more short-term focus than does cultivation. Extraction is based on the assumption that there are finite value in each activity and the goal is to glean as much as possible as fast as possible. Cultivation rests on the idea that, with proper stewardship, there can be a virtuous cycle that allows almost infinite value to be created over time.

Investors tend to be extractors and the market rewards executives (who, these days, tend to be major shareholders as well if they work for public companies) for short-term results. Market players don’t care if your firm falls off a cliff tomorrow — so long as they sell the stock today. In an interesting snapshot of how equity analysts can drive short-term mania, McKinsey Quarterly recently published a chart showing that these analysts have consistently over-forecast earnings growth over the past 25 years.  Analysts expect 10 – 12% but companies have delivered 6% — an over-estimation of about 100%.

Owner-operators, executives at private firms and social enterprises, and employees tend more toward cultivation: they are in it for the long haul and so don’t want to reap value to the detriment of future performance. They can be more prudent in their forecasts and profit-taking. This is a generalization in both cases but “making the quarterly numbers” is a do-or-die exercise in many public companies.

The rise of social enterprise and a heightened attention to sustainability issues, in my view, reflects a desire to reset the balance between these two forces. Cultivation was the norm in business for many years. Investors looked for income from dividends and steady growth of share price over time. This changed somewhere around 1980 with the growth of leveraged buyouts, arbitrageurs, private equity, and other variants on financial “services” that promised spectacular returns by unlocking value that was supposedly languishing in firms. Buy them up, tear them apart, lay off as many people as you can, and sell them off — the ultimate goal was to deliver immediate shareholder returns. The big shareholders, as you’ll recall, are short-term players (as opposed to average 401K-type investors saving for retirement and often using mutual funds rather than individual stocks). These weren’t activities focused on making things or delivering services but rather were pure financial plays.

There is a place in markets for quick-turn artists but it can’t be a dominant one.  This isn’t an anti-profit rant; profits are essential to financial sustainability. However, just as the Earth can’t support a global population that consumes as ferociously as do Americans, our economy can’t thrive when too many people are more focused on taking out than putting in. In case you hadn’t yet guessed, I’m a fan of cultivation and I think that it is in our collective best interest to support those companies that “farm” rather than “mine” for a living. More and more firms seem to be recognizing this — and that their environmental and social impact is as significant as their financial returns. So, too, are consumers and that’s good news.

How does your organization manage the tension between extraction and cultivation?

I quickly realized that after I had paid off the mortgage (and those of various family members), given the nieces and nephews money for college, and bought a few things, I’d still have a lot of money left over. It was then that I had the idea that became Small Cities, Second Chances — a proposal of sorts that asked if targeted micro investments could revive a city like New Bedford or Lawrence (both in MA), places that seem to languish economically despite their proximity to vital urban centers (Boston in this case).

Major investments like a sports stadium, condo complex, or mall never seem to be able to bridge the gap. I began looking at the challenge as one of system design and looked for opportunities where a relatively small investment could possibly deliver outsized returns. The things I advocate for in the Small Cities Prospectus combine public and private interests and include a number of support services such as coaching (this was written before social enterprise was a widely embraced concept). I specifically include investments that don’t come with a direct economic return, as I think that money looking for a return can be put to use in complementary investment, and don’t provide the chance to have something named after anyone (naming potential seems to attract traditional public sector investment). I want to plug the gaps, not eliminate these other efforts.

I view the prospectus as a starting point: some of the items I put forth might work and others might not. The elements that I see as critical, indeed essential, are commitment, creativity, and community. The small city in question must be able to demonstrate that a broad range of stakeholders are interested and engaged in the effort (commitment), that they are willing to try a number of new ideas and aren’t afraid to have some of them fail (creativity), and the effort must include people across the full demographic spectrum  and put equal value on the public and private benefits and costs (community).

I still buy the occassional lottery ticket in hopes of being able to make this a reality. In the meantime, these ideas are offered under a Creative Commons license so you can use them for non-commerical purposes as long as you attribute the source. Or if you are an adventurous angel investor, let’s talk.

Small Cities Prospectus

As you’ll hear me say in this short video, money and meaning are not strange bedfellows.