Challenging Work and Corporate Responsibility Will Lure MBA Grads

STANFORD GRADUATE SCHOOL OF BUSINESS—A survey of 759 graduating MBAs at 11 top business schools reveals that the future business leaders rank corporate social responsibility high on their list of values, and they are willing to sacrifice a significant part of their salaries to find an employer whose thinking is in synch with their own.

The study by David Montgomery and Catherine Ramus of UC Santa Barbara examines the tradeoffs students are willing to make when selecting a potential employer. They found that intellectual challenge ranked number one in desirable job attributes, while money and location were essentially tied for second, each roughly 80 percent as important as the most important factor. “Had money not been ranked high, I would have thought I’d made a mistake,” says Montgomery, the Sebastian S. Kresge Professor of Marketing Strategy, Emeritus.

A reputation for ethical conduct and caring policies towards employees ranked high as well—75 percent as high as intellectual challenge and 95 percent as important as the financial package. “I was frankly surprised that ethics and caring about people came up so important as they did,” says study coauthor Montgomery of the Stanford Graduate School of Business. “This augurs well for the character of the 21st century MBA.”

Other attributes of corporate social responsibility, including environmental sustainability and care for the community and other stakeholders, was weighted with over half the importance of the top job criterion, intellectual challenge.

Montgomery first looked at MBA job preferences some 30 years ago, but his initial interest was really methodological, he says. He wanted to demonstrate that conjoint analysis could predict behavior with a reasonable degree of accuracy. It does.

Montgomery and the late Dick Wittink, the George Rogers Clark Professor of Management and Marketing at the Yale School of Management and editor of Journal of Marketing Research, conducted interviews with MBA students early in the winter quarter of 1978, and used the results to make predictions about the types of jobs the graduates would accept. When the researchers compared the jobs the grads actually accepted the following spring, they found that the results of the conjoint analysis made a correct prediction 68 percent of the time. Chance alone was below 30 percent.

Because conjoint analysis has been shown to successfully predict MBA job preferences and choice, it answers one obvious objection to Montgomery’s work: “Aren’t the answers influenced by the subject’s desire to appear (both to the interviewer and to him/herself) socially conscious or at least, not greedy?” What’s more, the recent interviews were not conducted in person, but anonymously online, so there is also less chance of bias contaminating the answers.

Montgomery developed his own software to administer conjoint testing in the 1970s. A more sophisticated, commercial product called Sawtooth Software was used in the recent studies. The software poses questions to the subject; follow-up questions vary according to the content of the previous answer.

Montgomery, the former dean of the School of Business at Singapore Management University, travels widely and uses those opportunities to gather data. During appearances at business conferences in such venues as Seoul, Singapore, and Dubai he asked the largely American audiences how much of their salary they thought graduating MBA students would forego to work with an employer who shared their values of corporate responsibility. The majority (55.8 percent) thought the grads would sacrifice between zero and $3,000 a year, while just 5.4 percent put the number at $9,000 a year or more.

Seem accurate? It wasn’t. The attendees greatly underestimated the dollar amounts the grads would be willing to give up, a finding that shows the results of the broader study are far from intuitive.

Montgomery and Ramus broke down corporate responsibility into four categories: caring about employees, caring for stakeholders (such as community residents), environmental sustainability, and ethical business conduct. A fifth category was a model that shared all of the above characteristics.

The researchers found that the students expected to earn an average of $103,650 a year at their first job. Nearly all (97.3 percent) said they would be willing to make a financial sacrifice to work for a company that exhibited all four characteristics of social responsibility. They said they would sacrifice an average of $14,902 a year, or 14.4 percent of their expected salary.

Montgomery concedes that the students may have inflated the dollar amounts they would be willing to sacrifice, but because those numbers are very consistent with other data within the study, he said he believes the overstatements are not large.

Montgomery says he finds the results hopeful. “I wouldn’t have been surprised if the financial package had turned out to be most important,” he says.

As for the future, he and his colleague are broadening their sample and looking to see how gender and nationality figure into MBA job choices. His preliminary take: “It’s not a ‘Men are from Mars and Women are from Venus’ sort of thing,” though women do seem more concerned with social factors than men are, he says. Regional variations exist as well, with Europeans less likely to be concerned with attributes of corporate social responsibility than their counterparts in North America.

It appears, then, that recruiters may need to fine-tune their pitches to take into account the rising social consciousness of business students.

The Thought of Acquiring Power Motivates People to Act

STANFORD GRADUATE SCHOOL OF BUSINESS—In the wake of Barack Obama’s “yes we can” victory, a timely study has emerged from the Stanford Graduate School of Business about what motivates people to take action. The prime mover, say researchers, is acquiring a position of power.

Specifically, it is people’s new, more elevated perception of themselves after assuming a position with more power that inspires them to take more risks and pursue goals more confidently. Taking on a formal position of power—be it managerial, political, or cultural—gives people the illusion they have more control over their organization and their world, which, in turn, can propel them to go for the gusto. In the best-case scenarios, this can lead to achieving unimaginable accomplishments. In the worst, it can lead to poor decision making and devastating losses.

In one study, researchers stimulated thoughts of empowerment among a group of participants by having them describe in writing a time when they had power over others. Another group was asked to write about a time when they were not empowered. Researchers then measured participants’ mindsets by asking them to predict the outcome of a roll of a die. Participants’ choice either to roll the die themselves or have another person roll it for them served as an indicator as to whether they were feeling confident or not in the moment.

“When people feel they can control the outcome, they want to roll the die. It’s a classic measure of the ‘illusion of control,’” explains Nathanael Fast, a doctoral candidate in organizational behavior at the Graduate School of Business, who conducted the study with Deborah Gruenfeld, Moghadam Family Professor of Leadership and Organizational Behavior at the Business School; Niro Sivanathan of the London School of Business, and Adam Galinsky of Northwestern University. In this experiment, 100 percent of the “high power” group chose to roll the die themselves, as opposed to only 58 percent of the “low power” group. “This shows that power boosts people’s sense of control over outcomes, even when the outcomes are based entirely on chance,” Fast says.

In a second study, one group was assigned to the role of manager, another to the role of subordinate. All participants were told they would do a role play, but first they were asked to complete an unrelated activity that involved reading about an organization and rating how much control they thought they could have working in that organization, as well as how optimistic they were that the organization could do well.

Those designated as managers were significantly more optimistic about the organization in the material they read; they thought they would have more control over the organization’s fate than those in the subordinate group. “People with a position of power believed they could control outcomes that stretched beyond their actual power,” says Fast.

This finding may explain why CEOs sometimes make over-optimistic decisions, such as paying too much for mergers or acquisitions. “Because of the illusion of control that their role gives them, they may tend to overestimate how much influence they will have in turning such transactions into huge profits,” Fast observes.

In a third study, participants were again primed by being asked to write about situations in which they had been either empowered or disempowered. They then took a self-esteem test and were asked questions such as whether they would vote in the next election, to what extent they thought their vote would affect the outcome, and how much influence they believed they had over the national economy.

Participants who were primed for power had much higher self-esteem scores and a much greater illusion of control than those primed for disempowerment. They were more likely to say they would vote and that their actions could have an impact on the world.

The investigators ruled out the argument that mood drives people to act. They found that “happiness” levels were similar regardless of which group they were in. “It’s because power gives people a sense of control, not happiness, that it inspires more confident action taking,” he said.

“One implication of this work is that powerful people shape our world not just because they have resources, but because they believe they can shape the world –– and therefore they try,” says Fast. “People with low power mindsets do less than they otherwise could.”

Because those who believe they are empowered are more active and productive, managers may want to create more confident employees by giving them a say in their organizations, he suggests. On the other side, leaders need to caution against over confidence. “When someone takes on an air of invincibility after being promoted to a more powerful position, the effects on an organization can be devastating,” says Fast.

What is required, he suggests, is a system that ensures critical thought. “Research shows that carefully evaluating the pros and cons of a decision tends to reduce the illusion of control,” he says. Instituting mechanisms that require deliberation is the key to preventing snap decisions by CEOs with little time and big egos.

It Really IS The Thought That Counts

STANFORD GRADUATE SCHOOL OF BUSINESS—’Tis the season, and if you’re like most people you’ll probably end up dropping a heftier sum of cash than you’re comfortable with on presents for loved ones and colleagues. The findings of a recent study, however, might encourage you to think twice about what you really need to spend.

Two investigators from the Stanford Graduate School of Business have found that when it comes to putting out money for gifts, less may well be more. In several studies, they discovered that although most gift givers assume that a more expensive present will be more appreciated, receivers don’t appreciate expensive gifts that much more. In fact, the old aphorism still holds true: money can’t buy you love.

In one study, researchers looked at one of the most common large-ticket items purchased year-round: the engagement ring. Surveying recently engaged couples online, they found that, on a scale of one to seven, men consistently thought their rings were more appreciated by their fiancées the more expensive they were. Fiancées themselves, however, did not rate themselves as any more appreciative if the rings were more costly.

“This shows that men shouldn’t feel bad if they can’t afford to buy the ring they really want,” says Frank Flynn, associate professor of organizational behavior at the Stanford Graduate School of Business and a co-researcher on the study. “The fact that the thought counts more than the price tag is important for people to realize, especially in these challenging economic times when people are really strapped for cash.”

In a second study, Flynn and an associate asked a nationwide sample of participants to think about a recent birthday gift they had either given or received. Participants described a variety of gifts, including t-shirts, CDs, jewelry, wine, books, and home décor items. Again, those who were givers expected that more expensive gifts would make the recipients feel significantly higher levels of appreciation. In contrast, the recipients said they did not feel greater appreciation levels for gifts that had cost more.

“You simply don’t have to spend that extra hundred dollars to get the same level of appreciation for a gift,” observes co-researcher Gabrielle Adams, a doctoral student in organizational behavior at the Business School. In fact, say the investigators, givers are likely to spend $100 to buy a gift that receivers would only spend $80 to purchase for themselves. Economists call the excess $20 “deadweight loss”—money consumers could have better spent in other ways.

In Flynn and Adams’s third study, participants were asked to think about giving or receiving either a CD or an iPod as a graduation present. Once again, those who were randomly assigned to be “givers” thought by giving the more expensive iPod their present would be appreciated more in contrast to the CD. The “receivers” rated no difference in appreciation levels, regardless of which item they were told to think about getting.

The same attitudes that we show towards gifts wrapped with a bow can be seen in the business arena. Flynn and Adams say companies do not necessarily have to go overboard in rewarding employees for a job well done. “In the dot com boom, you heard about excesses such as organizations rolling out Harley Davidsons as Christmas gifts for staff,” Flynn says. “The recognition that’s conveyed through smaller gestures, perhaps done more frequently, is just as meaningful, if not more so, than large, splashy gifts.”

And on the home front, the research shows that people need not feel guilty about putting spending caps on their holiday gift budgets—which should be a welcome balm in these financially troubled times. “The people for whom your gifts are destined won’t necessarily know you were weighing and measuring items with different prices,” Adams says. “They’ll more than likely just be happy to get any gift at all.”

How to be a good boss in a bad economy

When cutbacks are necessary, can a good boss do right by the company's finances and by its staff? Some pain is probably unavoidable, but Stanford management science and engineering Professor Bob Sutton says that psychological and organization theory research suggests clear ways to handle such situations with a minimum of harm to the people and company involved. He makes that case in this month's issue ofHarvard Business Review.

"The best bosses understand that there is a difference between what they do and how they do it," says Sutton, author of the 2007 New York Times bestseller on bad bosses,The No A**hole Rule. "This article is about evidence-based ways to make and implement tough decisions such as layoffs, pay cuts and the like in ways that protect both human dignity and organizational performance."

Bosses often mishandle the organizational psychology of recessions because they get caught in a Catch-22 of human nature that Sutton calls the "toxic tandem." Many researchers have shown that people in power tend to become somewhat oblivious to the needs of their subordinates, Sutton says, but subordinates usually watch their bosses intently for any sign of what's going on and typically assume the worst—and they watch their bosses even more closely during scary economic times. As bad as times may truly be, Sutton says, the toxic tandem magnifies fear and paranoia, which undermine morale and productivity.

In the article "How to Be a Good Boss in a Bad Economy," Sutton brings a number of sources together in concluding that good bosses are those who can look beyond their own needs and stresses, and attend to four of their employees' psychological needs: predictability, understanding, control, and compassion.

Four ways to be a good boss

Predictability: Studies of people and animals show that the ability to predict pain not only makes experiencing it much more bearable but also offers sufferers the ability to enjoy relative calm when they can be sure the pain isn't imminent. Bosses who can give employees definitive warning of when the ax will fall and when it won't can help make the process of making cutbacks less disruptive. In the article, Sutton presents as models managers who guaranteed to employees that no layoffs would be made "for at least three months'' or others who made deep cuts up front but with the guarantee there would be no more for at least six months.

Understanding: People are also much more able to tolerate adversity if they know why it is upon them, Sutton says. Bosses therefore probably cannot go too far in offering a sincere and informative explanation over and over again.

"Your job as boss is to design messages that will get through to people who are distracted, upset and apt to think negatively given any ambiguity," Sutton wrote for the journal's decidedly managerial audience.

Control: Few bosses are likely to give the rank and file control over cutbacks, but they can give employees some hope that their hard work to keep the company afloat will be successful. Citing the research of University of Michigan organizational theorist Karl Weick, Sutton advises bosses to engage employees in the process of breaking down the company's big-picture challenges into manageable parts. That exercise will help ensure that the work gets done, and will give employees a sense that they can have a positive impact on their situation.

Compassion: In the article, Sutton describes an Ohio State University study in which manufacturing employees who were treated callously by their boss during the process of closing their plant stole more from the company than workers at a nearly identical plant who were given a compassionate and detailed hearing by their boss during the same process. Respecting the dignity of those laid off, Sutton says, will help preserve the loyalty and productivity of the workers who stay.

Sutton emphasized that managing during rough times challenges even the most experienced bosses, but "the best find ways to preserve the dignity of everyone affected and look beyond the immediate crisis, often asking themselves, 'When I look back on what I did, will I be proud or ashamed?'"

Are Wall Street Careers Just the Luck of the Draw?

STANFORD GRADUATE SCHOOL OF BUSINESS—Paul Oyer backs away from using the word "luck." But nevertheless his research shows that many young MBAs who go into investment banking might just follow that career due to happenstance as much as because of a die-hard allegiance to Wall Street. And those who graduate during a bear market may never get the chance later to start a Wall Street career—a fact that dramatically cuts down on their lifetime earnings.

"It always struck me that being in the right place at the right time was important in career paths," said Oyer, a professor of economics at the Stanford Graduate School of Business who studied the long-term career choices and salaries of more than 35 years' worth of the School's graduates. Oyer, who also researched career choices of PhD students, said he’s not surprised by recent research that finds the same career pattern for undergrads’ career tracks.

Oyer conducted surveys in 1996 and 1998 and concluded that random factors play a large role in determining the kinds of jobs that MBAs take upon graduation. Specifically, the proportion of graduating MBAs who manage to get hired into lucrative investment banking positions shrinks or expands depending on how well the stock market is performing in a given year.

For example, more than a quarter (26 percent) of Stanford MBAs who graduated two years before the stock market crash of 1987 became investment bankers. But just 17 percent of the MBA graduates two years after the crash took that career path. And the difference in payoff was huge. Based on the salaries provided by thousands of MBAs in this self-reported survey, Oyer calculated the present value of lifetime income of an MBA who went into investment banking to be $2 million to $6 million higher than an MBA who went into a non-banking career. "Thus the classes of 1988 and 1989 could expect significantly lower lifetime income due to the timing of their graduation than the classes of 1985 and 1986," said Oyer.

Oyer also discovered that MBAs who go into investment banking—a category in which he includes money managers and venture capitalists—tend to stay there for the long term. For example, in the first few years after receiving their MBA degree, 5 to 10 percent of the people in investment banking leave, but attrition slows significantly after the fifth year and the percentage of a typical graduating class that works in investment banking does not change significantly after that point.

Thus although it might seem intuitive to believe that there are a limited number of MBAs who have a natural aptitude for investment banking, there's no evidence to support that. Instead, the significantly greater numbers of MBAs who go into investment banking during bull markets are just as dedicated to banking in terms of how long they stay there and how much money they make. "This tells me that there is a deep pool of potential investment bankers in any Stanford MBA class," said Oyer.

Another of the surprising things Oyer found during his research is that MBAs are not hopping in and out of investment banking in search of the perfect job. "The idea has long been that MBAs change jobs all the time. But what this study shows is that they are not jumping in and out of investment banking. It's pretty sticky. Once you're there you tend to stay; once you've started down another path, you're not likely to move to a Wall Street firm."

The research also suggests that bull markets might discourage entrepreneurs. "One question you would naturally ask, if in bull markets more people go into investment banking, what they are not doing?" asked Oyer. "And because there are a fairly limited set of things that MBAs do, there's some evidence that when bull markets move people onto Wall Street, it takes away from consulting and entrepreneurial careers."

On thing that the study does bear out is that graduating MBAs are correct in perceiving that general economic factors in the year they graduate will have profound long-term implications on their careers. "Every year our students get very anxious about the state of the job market. I always thought we—because I was the same way when I was finishing school—were being silly," said Oyer. "But as it turns out, we had pretty good reasons to be worried about the state of the job market, as it would affect a lot of us for a long time to come."

Self-Identified Multiracial Individuals Realize Real Benefits

STANFORD GRADUATE SCHOOL OF BUSINESS—At some point in your life, you've probably checked off a box on a form that asks you to specify your ethnicity. But educational and governmental organizations are under increasing pressure to include a multiracial option rather than forcing individuals with complex racial heritages to choose just one category.

For Kevin Binning, Miguel Unzueta, Yuen Huo, and Ludwin Molina, this raised a provocative question: Does identifying themselves as multiracial help or hinder the psychological well-being of individuals of diverse ethnicity?

Previous studies had assumed that if an individual had a multiracial heritage that he or she automatically identified with that heritage. Yet Binning and his fellow researchers hypothesized that simply belonging to multiple racial groups did not guarantee that a person would psychologically identify with all of those groups. "We thought that digging deeper into the multiracial category to examine how such individuals interpreted their racial identity would help our understanding of multiracial psychology," said Binning, a post-doctoral scholar at the Stanford Graduate School of Business and coauthor of "The Interpretation of Multiracial Status and Its Relation to Social Engagement and Psychological Well-Being," published recently in the Journal of Social Issues.

In the study, high school students who belonged to multiple racial groups were asked to indicate their ethnic heritage by checking as many boxes as necessary on a form. They were also asked an open-ended question about which groups they primarily identified with. They were then classified as identifying with a group the researchers had designated as having a relatively low social status (black or Latino), a relatively high social status, (Asian or white), or multiple groups (for example, black and white or "multiracial"). Those who identified with multiple groups reported either equal or higher psychological well-being and social engagement than those who identified primarily with a single group.

Interestingly, it didn’t matter whether the groups the students identified with were characterized as low or high-status. "We were surprised to find virtually no differences between individuals who identified with either low- or high-status groups," said Binning. "What mattered was whether they acknowledged their multiracial identity." In the past, research suggested that members of high- and low-status groups differed psychologically.

Binning and his associates have some theories about why there might be some psychological benefits associated with having a multiracial identity. "For one, perhaps being able to 'stand one’s ground' and reject social pressure to identify with a single racial group indicates resiliency," said Binning. Additionally, instead of falling between the cracks of two separate cultures, individuals who identify with multiple groups might be better equipped to assimilate into both racially homogenous and racially mixed environments. In this way, multiracial individuals in diverse environments might have a broader sense of "fitting in," which can boost both their psychological and social well-being.

Alternatively, being forced to identify with one race over another can be disconcerting. "If I'm a member of multiple groups and forced to identify with only one group, I'm—by necessity—rejecting part of my identity," said Binning. "Typically, this means taking on the race or ethnicity of one parent over another. This can put people on the defensive, emotionally."

The authors also felt that individuals who feel comfortable in several different cultures might be able to better "frame switch" between different cultural mind sets.

"Such individuals might be able to seamlessly switch between their different cultures' ways of perceiving the world, which could help them navigate through racially diverse environments," said Binning.

Given that this research highlights the benefits of possessing a multiracial identity, should society encourage individuals to adopt this attitude? "Much more research is needed to determine an answer to this," said Binning. A major question, for example, is whether adopting a multiracial identity causes psychological and social well-being, or if the reverse is true. "It could simply be that better-adjusted individuals tend to accept their multiracial identity," said Binning. "We're not sure at this point what the causal relationship is."

The data reported in this article is part of a larger data set collected with a UCLA Center for Community Partnership Grant awarded to Yuen J. Huo, an associate professor in social psychology at the University of California, Los Angeles. Coauthor Unzueta is an assistant professor at the UCLA Anderson School of Management. Molina is an assistant professor of social psychology at the University of Kansas.

One of the reasons that this research study is getting a lot of attention is President Barack Obama’s own mixed-race heritage. "In his books he stresses his own mixed ethnicity, and how he struggled with that during his teenage years," said Binning. And as the U.S. population becomes increasingly heterogeneous, "this issue is only going to become more important in coming years."

Work-Life Balance: Men Want It, Too

The past 40 years have seen extraordinary changes in our workplaces and families. Women have entered the workforce in unprecedented numbers and improved their earnings relative to men. At the same time, men have begun to share women's traditional family roles, and men and women have both increased the time they spend with children. Also, as life expectancy has increased and women are employed outside of the home, it has become necessary for both women and men to balance employment with time to care for their elderly parents.

Our workplace policies have not caught up with these new realities. We still behave as though it is the primary job of men to be breadwinners, and the primary job of women to be homemakers and caretakers of children and the elderly. Companies and other organizations that want to continue to attract and retain superior talent-men as well as women-need to develop policies that allow their employees to be successful both at home and at work.

The first phase of the workplace revolution focused on women, and it is still unfinished. But a new development is that talented men have also become stakeholders in this revolution. I know-I have taught a course on work and family for many years and my students used to be all women. Now about 40 percent are men, and like their female classmates, they want to work for organizations that allow them to make use of their intellectual and managerial skills but still leave them time and energy to be successful husbands and fathers.

In 1970, less than half of adult women were in the labor force. Today that figure is almost 60 percent. For mothers of children under 18, it is even higher, 71 percent. And for women with a college education, it is 80 percent.

Women's earnings have also increased, even when adjusted for inflation. In 1970, women who worked full time earned only 59 cents for every dollar a man earned. Today, it is 79 cents. In 1970, working wives contributed only one quarter of their families' income. Today, it's slightly more than a third. Notably, in 25 percent of families, the wife earns more than her husband.

But women still pay an earnings penalty for having children. On average, those who have one child earn about 10 percent less than their counterparts who are not mothers; it's another 14 percent less with two children. And the more education a woman has, the higher her motherhood penalty.

On the home front, married men and women now divide housework about one-third/two-thirds, and married parents divide caring for and playing with children in about the same ratio. This is a substantial change from the 1970s, when the ratios for both were about 20/80.

Moreover, the number of hours that fathers and mothers together devote to caring for and playing with their children has increased by 40 percent.

And not all children are raised in two- parent homes. Single parents now head up 30 percent of families with children, up from about 13 percent in 1970.

Another major social change since 1970 is that many adult children care for elderly parents. One in five adults over 65 needs help with basic activities; and three-fourths of the elderly outside of nursing homes rely on unpaid caregivers. While adult daughters provide two-thirds of unpaid care for elderly parents, adult sons provide about one-third.

Employers need to develop flexible workplaces beyond providing paid maternity and paternity leaves. They should have programs that allow women and men to reduce their hours or move into less-demanding jobs when their children are young or their parents are ill, and to move back to full-time work without penalty. Employers would do well to follow the example of Deloitte, which lets employees take leave or reduce their hours for a period of time and return without a penalty in earnings or job responsibility.

Employers also should provide childcare benefits even if they don't operate a childcare center, and provide geriatric care managers to help their employees with elder-care responsibilities.

Companies that develop policies to fully utilize the talents of all their employees while allowing them to be successful in their family lives will retain an important competitive edge.

Empowered Employees Make the Difference, Says Four Seasons CEO Sharp

Hiring people who embrace the hotel's customer-focused credo has made the Four Seasons Hotels and Resorts chain a success, Founder Isadore Sharp told the Entrepreneurship Conference at the Stanford Graduate School of Business. And giving the firm's front-line employees power to make decisions has added to that.

STANFORD GRADUATE SCHOOL OF BUSINESS — Isadore Sharp knows that a key reason his hotel chain is one of the best places in the world to work is because he decided three decades ago to fire several top people.

In his keynote speech February 26 at the annual Stanford Graduate School of Business Entrepreneurship Conference, the founder, chairman, and CEO of Four Seasons Hotels and Resorts said that when the company expanded about 30 years ago, it made its credo more explicit: Workers should treat others the way they would like to be treated. Many companies have similar philosophies, but Four Seasons added a twist. "What was new," Sharp said, "was we enforced it."

That meant firing senior managers who weren't following the credo. "If we’re seen showing greater concern for power, prestige, and costs than for the customer and the values we profess, then we forfeit belief and trust along with our goal of trying to be the best."

When Sharp opened a modest motor hotel in Toronto in 1961 and called it the Four Seasons, he was simply a builder making a real estate play. "In all candor, there was no vision; there was no grand dream."

But he saw how important customer service was, and how the right employees could deliver that.

He said the hiring policy is crucial at Four Seasons, a place constantly included on Fortune magazine’s annual list of the best 100 companies to work for. Most companies hire for experience and fit. Four Seasons hires for attitude.

"We want people who like other people, and are therefore more motivated to serve them," Sharp said. "Competence we can teach; attitude is ingrained."

Sharp said marketing research found that customers value luxury, but that didn't necessarily mean elegant surroundings or gourmet meals. “"When we looked closely, it became clear that the greatest luxury for our customers was time. And service could help them make the most of that, giving them greater productivity, greater enjoyment."

But no one in a central office could ensure good service. "The outcome in our industry normally depends on the front-line employees — doormen, bellmen, waiters, maids, the lowest-paid people — and often, in too many companies, the least motivated. These front-line staff represent our product to our customers. In the most realistic sense, they are the product."

So, Four Seasons gives front-line workers the authority to make most decisions they feel are needed to satisfy guests. "When our employees are trusted to use their common sense, they can and do turn mishaps into new service opportunities. Then, what the customer remembers is not the complaint, but the outcome."

Seeing customers happy bolsters employees' self-esteem, Sharp said. "This requires managers who are less bosses than mentors and communicators, whose role is to bring out each individual’s best and weld them into a winning team."

Sharp spoke with pride about how employees reacted when a tsunami struck the Four Seasons in Maldives in 2004, doing whatever they could to ease people’s concerns and calm nerves. That included chartering a plane within 24 hours to fly every guest to safety. "They’re motivated by an inner need to do well by others."

He said employers often believe that workers value job security and competitive pay the most, but the Fortune best-places-to-work companies understand that job security is tentative in this economy, and other items are more important to workers than salaries.

"Employees in these firms value primarily three things: first, to work for leaders who inspire their best; second, a physical environment that makes work enjoyable; and third, and I think most important, a sense of purpose, and a feeling they’re working for more than a paycheck — that they're helping to build a company that they can take pride in. In short, some daily meaning along with their daily bread."

Four Seasons has 83 hotels with plans to grow to 150 within a decade. Sharp said the philosophy won’t change, not only because so many decisions are made at the hotel level, but also because virtually every senior leader is promoted from within, and so understands how important rank-and-file employees are.

He recalled having dinner with one of the owners of the chain's hotel in Istanbul about a year after it opened. She asked where he got the employees. Locally, he said.

"She said, 'No, no, no. These are not Turkish people.' I said, 'What do you mean?' She said, 'I have Turkish people working for me, and these are not Turkish people.' "

But they were, of course. They had just found the right place to work.

Quality Education Is a Civil Rights and Economic Must-Have

Ensuring a quality education for all students is both "the number one civil rights issue of our time and the number one economic competitive issue of our time" according to Jonathan Schnur, education reformer and cofounder of the New Leaders for New Schools nonprofit group.

STANFORD GRADUATE SCHOOL OF BUSINESS —Education reformer Jonathan Schnur is on a mission to boost America's urban public schools, a complex goal he believes can be achieved only by having an army of amply prepared and committed educators leading the way.

Schnur is chief executive officer and cofounder of the nationally acclaimed New Leaders for New Schools nonprofit group, which, during the past decade, has trained hundreds of educational leaders for key roles in urban schools. He called ensuring a quality education for all students both "the number one civil rights issue of our time and the number one economic competitive issue of our time" during his keynote speech to the Business of Education Symposium at Stanford University on May 11.

Schnur told the audience — attentive MBAs from the Stanford Graduate School of Business as well as students from the Stanford School of Education — that they hold the key to a solution for the persistent education achievement gap between poor and privileged students. "I so deeply believe that those of you in this room, and colleagues of yours around the country, are going to be at the center of whether we seize or squander this historic opportunity we've got for our kids," he said.

In introducing Schnur, Deborah Stipek, the I. James Quillen Dean of the Stanford School of Education, praised New Leaders for New Schools for its creative approach to solving a persistent problem. The nonprofit organization maintains "a very different way of developing leadership skills and school leaders than we have had in the past," she said. "I think the organization has really been an inspiration for those of us who have been searching for some alternatives to the status quo, which I think has not been working very well."

Schnur began his talk with a quick history lesson explaining how the education gap in America evolved. He cited the case of his own great-grandfather, who came to Milwaukee, Wis., from Europe at the turn of the last century. With just a third grade education, he "had what he needed in order to get a decent job, start a little company, and really be successful," Schnur said.

Today's landscape is vastly different, with the fastest-growing jobs requiring a high school education, if not advanced degrees. While in the 1960s and 1970s the United States was ranked number one in the world in terms of the percentage of students completing high school and college. "Today we've slipped to the middle, and we are dropping," Schnur explained.

This decline hasn't happened because school completion rates in the United States have worsened. "The issue is that the rest of the world is moving ahead in order to prepare themselves and their kids for this century and this economy," he said. "The gap is growing dangerously large because we are standing still."

As examples of the most glaring deficiencies of U.S. public education, he cited research showing that only 1 in every 10 kindergarten children from low-income families graduate from college; that the majority of low-income 4th graders read below a basic level; and that more than half of urban students — many of them people of color — end up dropping out of high school.

That's where initiatives such as New Leaders for New Schools can make a difference.

Already, more than 640 New Leaders trained by the New York-based group are serving 220,000 children. By widely employing his group's methods emphasizing preparation, commitment, and high expectations at many more schools nationwide, Schnur said, "It would make us a much fairer society."

Schnur cofounded New Leaders in 2000 after he had been a member of the U.S. Department of Education’s staff, serving as special assistant to Secretary of Education Richard Riley.

While at the national level, Schnur said he noticed a common denominator among the nation's great schools — they all had exceptional principals who recruited and retained extremely effective teachers. So, after leaving the department, he and his colleagues developed a plan to train people — from both inside and outside the education field — to be excellent principals intent on turning around struggling schools and boosting student achievement. Their strategy to create effective school leaders involves combining coursework, on-the-job training, and mentoring.

He invited the audience to enlist in his group's effort: "If you're fired up to spend many years — for the long term, not the short term — as part of a community of leading schools, we'd love for you to apply."

From September 2008 to June 2009, Schnur took a leave from New Leaders for New Schools to serve as an advisor to Barack Obama's presidential campaign, as a member of the Presidential Transition Team and a senior advisor to U.S. Secretary of Education Arne Duncan.

He graduated from Princeton University with honors and took graduate coursework at Harvard's Business School, Graduate School of Education, and Kennedy School.

The Stanford event was sponsored by the Education Club, which engages Stanford business and education students in discussion about education issues, in conjunction with the Stanford School of Education.

Jeff Bezos Makes Magic Out of Online Retailing

"Any entrepreneur who actually thinks he could build a $30 billion company when he starts out needs to be institutionalized," joked Amazon founder Jeff Bezos, whose dreams for his young company did come true.

STANFORD GRADUATE SCHOOL OF BUSINESS—The business plan was hatched by a brainy computer science student from a respected East Coast university. His startup operated for a while out of a garage. He's been on the cover of Time magazine.

Bill Gates? Steve Jobs? No, Jeff Bezos – the other high-tech legend in the making with a multibillion-dollar company.

The CEO and founder of Amazon.com Inc., Bezos, 46, accepted the 2010 Entrepreneurial Company of the Year (ENCORE) award from the Peninsula Chapter of the Stanford Business School Alumni Association.

In remarks following an Oct. 27 dinner attended by about 230 alums, Bezos talked about how he started Amazon, what he finds missing in Japanese management theory, and why he likes the iPad.

The idea for Amazon first came, he said, while working for an investment fund after graduating from Princeton. "I knew web usage was growing 2,200% a year and if I wanted to start a company I'd need to hit the ground running," he said. So he wrote the business plan on a cross-country drive to Seattle, where he planned to settle. He even called a friend's attorney from the road to get the incorporation papers started – a divorce attorney, it turned out.

The company was founded in 1994 and, Bezos hesitantly admitted, first named Cadabra – as in abracadabra. It was changed three months later to Amazon after the earth's biggest river – offering earth's biggest selection.

No, he didn't think he'd be able to take the company to $30 billion (2009 revenue) in 15 years. "Any entrepreneur who actually thinks he could build a $30 billion company when he starts outs needs to be institutionalized," he said. "Any VC would look at that plan and think it was unrealistic."

Although he credited "a tremendous amount of planetary alignment – luck" for the company's growth, he did say that by "1997-98 we were sure it would be a $1 billion company. Maybe $5 billion to $10 billion if we had enough beer."

Quickly realizing that he needed seasoned people to manage that growth, the company brought in senior executives with experience operating multibillion firms. "They've been my mentors," Bezos said. "I'm always learning from my senior team."

Amazon's philosophy is to be "customer-obsessed, not competitor-obsessed, long-term oriented, and willing to be misunderstood," Bezos said. Many questioned his idea of selling books on the internet. But it turned out online retailing didn't put independent booksellers out of business, it wasn't bad for authors, and posting all kinds of reviews – even the bad ones – helped people make the right purchase decisions.

Bezos said he likes to bring new ideas to his management team and has brought in teachers of the Japanese kaizen philosophy, which focuses on continuous improvement of processes. In a moment of zen one kaizen master caught Bezos sweeping a floor and asked, "Why are you sweeping? Why not eliminate the dirt?"

"He only asked questions – where were the answers?" Bezos said to laughter from the audience.

Amazon sells many products beyond books now, but one of its top sellers is an electronic book reader, the Kindle. The company decided it needed to go beyond its skill set and build a customer-friendly way to read e-books. "The world changed and if we wanted to be the future of books, we would have to learn to build a hardware device."

Amazon doesn't reveal Kindle sales, but said this week that it sold more of its new generation e-readers in their first 12 weeks than any previous generation of the device.

Apple's iPad doesn't seem to be affecting sales negatively. In fact, some say it may be having the opposite effect, with some users reporting the device is not an ideal platform for electronic books.

You can buy books from Amazon and download them to your iPad, however, and Bezos said the company just launched a new front-end application specifically to do so. He doesn't see it as competition: "I like the fact you can lean back with your tablet and shop Amazon while lying on your sofa. I'm in favor of that."

More seriously, he said, like people need different shoes for running, for hiking and for work, people need specific devices for reading. "Kindle is the best purpose-built device for reading and there's a huge market."

— Joyce Routson

Firms in Corrupt Countries Pay a Price in Market Value

Virtue seems to pay according to Professor Charles M.C. Lee whose research shows that publicly-held firms in countries perceived as less corrupt trade at bigger market premiums than those in places deemed more corrupt.

November 2010

STANFORD GRADUATE SCHOOL OF BUSINESS—Stock markets are supposed to be the ultimate arbiter of company worth. But do they factor in a country's corruption, or virtue in valuing businesses?

Yes, says Charles M.C. Lee, an expert on markets and accounting at Stanford's Graduate School of Business. The GSB professor recently discussed his research showing that ethical lapses matter in the market value of companies. Publicly-held firms in countries perceived as less corrupt trade at bigger market premiums than those in places considered more corrupt, according to Lee. "Virtue seems to pay – at least over the longer term," he said in a November 5 talk.

On the flip side, "the market seems to price assets in more corrupt regimes as if they're worth less," said the Joseph McDonald Professor of Accounting. "Collectively as a country, when you're on average more corrupt, you have to pay for that when markets look at you and when capital providers come into your country."

Corruption isn't just a matter of appearing "unsavory", Lee said. There's evidence linking corruption to "social and economic ills" such as lower economic growth, less foreign direct investment, higher military spending, and worse health care and education, he said. One recent study found that lower corruption is associated with Protestantism, a British heritage, higher per capita income, a system of common law (versus civil law), longer-term exposure to democracy, and a more centralized form of government.

In Lee's research, corruption was defined as the "misuse of public office for private gains." This could include bribery of public officials, embezzlement of public money, and kickbacks in public procurement. Although malfeasance is difficult to detect and to measure directly,perceptions of a corrupt environment apparently do matter to investors. "You may say, 'what’s a little bribery here or there?' Well, when it adds up, your country doesn't look good to rest of the world," Lee said.

The talk elaborated on his paper published by the Journal of Investing in 2009 and co-authored with David Ng, an associate professor of finance at Cornell University. The study examined the relationship between the level of corruption in a country and the valuation of its corporations, concluding that corruption has "significant economic consequences for shareholder value."

The researchers ranked 44 countries based on the "Corruption Perception Index" (CPI) compiled yearly by Transparency International, a non-profit organization battling global corruption. The group’s "poll of polls" incorporates results of up to a dozen surveys on perceptions of public sector corruption as held by analysts, businesspeople and local residents.

Denmark, Finland, New Zealand, Sweden, and Singapore were rated the five "cleanest" countries, while Indonesia, Pakistan, Venezuela, India, and the Philippines were deemed the five most corrupt in the study by Lee and Ng.

The pair then correlated the corruption rankings with publicly available financial data on companies for 1994 to 2003. For each country, they calculated two measures of how stock markets value enterprises – the market price-to-book ratio of equity for the average firm, and the ratio of market value to book value for debt plus equity for the average firm.

The 44 countries studied were divided into three groups—"low corrupt", "mid corrupt", and "high corrupt." The results: the higher the corruption, the lower the market valuations. The average price-to-book ratio for equity was only 1.88 in high-corrupt countries, compared with 2.19 in mid-corrupt places, and 2.36 in low-corrupt ones. The study found that corruption was still significant even after controlling for other variables such as companies' inherent profit margins and countries' inherent growth rates or currency risks.

In the "cleanest" country, Denmark, the corruption index was 0.38 out of 10 and the price-to-book ratio was 2.12, slightly below the 44-country average of 2.26. The U.S., with a corruption rating of 2.36, had an above-average market multiple of 2.88. Indonesia, purportedly the least clean, had a corruption mark of 8.01 and a below-average price-to-book ratio of 1.95. China, with a corruption rating of 6.77, had a market multiple of 1.47, well below average.

Corruption can dampen shareholder value in a number of ways. Most importantly, a climate of malfeasance tends to reduce expectations of future corporate profitability, Lee said. What's more, highly corrupt environments often have weaker protection of minority shareholders. In many countries, ownership of publicly-held companies is not as widely dispersed as in the U.S. and Japan. So controlling shareholders can "creatively divert" money from the company, thus hurting minority shareholders, he noted. In addition, the costs of capital can be higher in corrupt countries, which are perceived as riskier by investors.

"It could be that in countries where bribing public officials is the norm of business, the cost of trust…is higher," Lee said, as described in the bookThe Speed of Trust, by Stephen M.R. Covey. Added Lee, "Everything moves at the speed of trust. If it takes a while to feel confident about the other party, transactions get sluggish. Trust is a big part of business."

An audience member observed that the cleanest countries in the study were richer, while highly corrupt ones were poorer. Indeed, high per capita income is associated with lower corruption, Lee said. "You can afford to be virtuous when you have a high GDP," he suggested.

Lee's talk was part of the "Ethics@noon" speaker series sponsored by the Bowen H. McCoy Family Center for Ethics in Society at Stanford's School of Humanities & Sciences.