When customers mailed in their cancellation notices, individual clubs were expected to issue a credit to customers' credit cards and void their membership agreements. Each cancellation ran between $500 and $3,700, and, until refunded, was reflected in each branch's cumulative monthly sales report.

 

Problems arose when sales managers stalled credit card refunds in order to inflate sales figures. Although the practice was technically legal (merchants have up to 30 days to issue credit card refunds), pressure was strong from top management to "keep the numbers up" while discussions about a buyout by a multinational corporation took place. Additionally, the sales manager's bonus of a company car was based on exceeding sales goals.

 

Despite numerous customer complaints, the manager continued to delay processing refunds. His rationale was that meeting sales goals -- and winning bonuses for the sales department -- was the primary goal, and that holding onto customers' money until the last moment was indeed legal. Eventually, an angry customer contacted a local television station to complain, resulting in an expose. The story was picked up by a local newspaper, then national newswire services, and was finally included in an NBC-TV "Dateline" story about membership scams, none of which emphasized that it was legal to hold refunds for 30 days.

 

The impact of the bad publicity was quick. Monthly sales skidded by 40 percent, and cancellations doubled. And, though the company was purchased, as expected, the new management team could not salvage the business and was forced to sell it back to franchisees for pennies on the dollar.

 

How Values Impact the Bottom Line
In light of recent corporate scandals, a discussion is building about corporate values and their role in fulfilling corporate financial goals. Although much has been said about compliance and averting fraud through legislation, what also needs to be explored is how corporate values can be harnessed to build profitable, sustainable organizations.

 

When corporate values serve as a foundation, businesses gain a strategic advantage that shows up in the financials. Whatever those values are, when they are real they impact the bottom line in a variety of ways, as they:

Values encompass many qualities, commitments and traits. Some dictate morality, such as integrity and honesty, but at a corporate level, it's also useful to consider values relating to a company's relationship to its community or global citizenship. At The Timberland Co., it's evident that "doing well and doing good are inextricably linked." That simple statement articulates a value that is at the core of many decisions made at Timberland. For example, its Path of Service™ program gives employees 40 hours of paid time off every month to serve in their communities.

 

The key to being values-based has little to do with which values are espoused and everything to do with whether those values are the actual guiding principles, or empty slogans.

 

Along with avoiding direct financial hardship, research also shows that a values-based approach can actually benefit the bottom line. According to former SEC Chairman Arthur Levitt, "ethical behavior and governance are as important to business as productivity." The Dow Jones Sustainability Group Index reports that companies using "triple bottom line" measures of economic, environmental and ethical sustainability outperform other companies in the stock market.

 

In another study, Burson-Marsteller established a link between a CEO's corporate reputation and the company's ability to attract investment capital, recruit the best employees and earn the benefit of the doubt in crises. The study also showed that a CEO's reputation for "ethical practices" enhanced the company's ability to increase shareholder value.

 

Creating a Values-Based Organization
Unfortunately, many companies claim to have corporate values but fail to adequately communicate or promote them. Enron had "Respect, Integrity, Communication, Excellence" as part of its former values statement.

 

Creating a culture that "lives" the values at all organizational levels is the best way to reap the bottom-line benefits. But this is only possible through values-based management. Just as most businesses have systematized Total Quality Management (TQM) practices -- creating metrics, policies and practices that reinforce the need to raise quality standards -- creating a values-based organization demands the same level of systematic attention.

 

Southwest Airlines can be seen as a values-based organization. Its three core values: 1) Work should be fun -- even playful -- so enjoy it; 2) Work is important -- don't spoil it with seriousness; and 3) People are important -- each one makes a difference, are translated into business practices that explain, at least in part, Southwest's financial success. Among its unconventional but values-reinforcing policies, Southwest hires those with the right attitude -- not necessarily skills -- and then trains them in needed skills.

 

Framework Consulting has identified a series of traits or strategies that a values-based company adopts:

During the 1990s, Sears, Roebuck & Co. demonstrated to itself a link between employee morale and resulting customer environment, correlating it to increased revenue. Sears continues to value employee satisfaction and believes it is a driver of financial success. In light of that, Sears has an annual employee survey called "My Opinion Counts" that tracks key indicators of employee satisfaction (including ethical and strategic issues), allowing the company to adjust and improve. The survey also demonstrates the need for everyone to reinforce and report value breaches.

 

Values Start at the Top
Management must become living examples of a company's values. When James Granger was hired in 2000 as CEO of Norstan Inc., a communications technology company targeting the enterprise market in North America, he had to resurrect a company that had lost its way after an interim executive team allowed its values-based philosophy to languish. The company was losing $8 million per quarter, had $80 million in debt and was, in Granger's words, "within days of filing" for bankruptcy.

 

While planning the first all-company meeting, Granger's fellow executives warned him not to share Norstan's cash position with employees. But Granger explained that because Norstan had integrity as a value, he had to be forthright about the company's true financial picture.

 

Granger's honesty motivated employees to seek ways to help turn the company around. By embracing all of Norstan's values -- integrity, collaboration, initiative and profitability -- employees understood when Granger had to delay raises by a full quarter. Granger was equally honest with his vendors. By the first quarter of the following fiscal year (2001), profitability had been restored and debt reduced to almost nothing, ultimately improving stock value and company profitability.

 

An Ethics Resource Center study found that 90 percent of employees value leaders with integrity as highly as they value income. When executives demonstrate those values, employees understand their true importance and can take responsibility for their own values-based behavior.

 

One client created a long-term goal to have every employee become a millionaire in 30 years, if they were still with the company. The values needed to accomplish this goal included frugality and superior productivity.

 

Employees embraced these values in large part because they were visibly practiced by management. The CEO and CFO made average salaries for the market, drove a Mitsubishi and Toyota SUV, respectively, and dressed in off-the-rack suits. They were seen as being true to the value of "frugality," despite the company's huge financial success.

 

Being values-based is in any CFO's self-interest. Because CFOs are responsible for all public financial accountabilities, they shoulder a disproportionate responsibility for legal compliance. But when sales reports are transparent, CFOs needn't perform internal due diligence or worry about the internal consistency of the reporting. The same goes for policies regarding the way sales are recorded, returns taken, proposals negotiated, payables handled and receivables collected.

 

CFOs can champion values by changing practices within their purview and by being highly communicative about doing so. This creates a model for the rest of the company, especially those within the finance area, to do the same. Consider auditing entire processes, starting at the lowest level of transaction or activity and working your way up. Doing so will unearth inconsistencies, and with them, opportunities for correction.

 

Executives at a local construction company demonstrate their commitment to values every time they have a bid accepted by an architect or developer by never renegotiating with a subcontractor. Sometimes it means that they make a smaller margin than they hoped for. But the pristine reputation they have developed with every vendor, buyer and construction industry observer is worth more than the potential short-term gain.

 

Finally, values-based organizations must invent metrics that track adherence to company values. They should go beyond traditional financial reporting styles to include non-traditional areas such as the environment, social performance, work environment, employee morale and any other area implied by their own values.

 

Building a values-based organization is an activity for marathoners, not sprinters. It's vital to stay the course, because to do otherwise will be interpreted as hypocrisy by employees. It isn't the easiest way to build a company -- but it is the most satisfying and will ultimately become the most profitable.

AMIE DEVERO is Vice President of Framework Consulting (www.fwconsulting.com), an international management consulting firm that helps generate results by linking strategy and people. She can be reached at 813.835.0044.

 

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