How to tell bad companies

Some years back, I published a book titled Bad Company: Behind the corporate mask, which the Sunday Times was generous enough to nominate as its Business Book of the Week. The book examines the curious phenomenon of large corporations sometimes behaving in insanely self-defeating ways, like when Shell tried to dump an oil platform in the North Sea, or Benetton advertised its woolly jumpers with images of racism, suffering and death, or Hoover bankrupted itself by offering free trips to Disneyworld.

At the end of that book I offered a structured approach to evaluating a company’s corporate psychological profile – a set of questions designed to tell bad companies from good ones.  I’m reproducing that final chapter below, as it becomes more relevant every day.

Corporate psychological profiling
In the days of the Wild West, it was easy to tell the bad guys from the good guys simply by reading the ‘Wanted’ posters.  Today, telling the bad companies from the good companies is not so easy: on the outside, they all look very much the same.

As customers, or shareholders, or suppliers, or even prospective employees, we need some rule of thumb to enable us to gauge the mental health and likely behaviour of the companies and other organisations with whom we come in contact.  Can the company be trusted?  Does it speak the truth?  Will it deal fairly and honestly with us in its transactions?  Will it keep its word?  And, perhaps most importantly, how will it behave when the chips are down?  If the organisation were an individual, is it the kind of person you would go mountain–climbing with, or exploring in the jungle?

One difficulty with identifying the corporate state of mind with any accuracy is that, like individuals, sick companies often appear perfectly normal.  Just as the psychopathic individual has learned to blend into the background by imitating his healthy peers, so the psychopathic company can pass most casual inspections as unremarkable.

Police organisations such as Scotland Yard and the Federal Bureau of Investigation have developed the technique of psychological profiling, to help them identify psychopathic offenders who might otherwise avoid scrutiny and escape detection.  Anyone interested in analysing the mental health of corporations and other institutions can make use of similar techniques to determine just how reliable and trustworthy companies are.  The following notes are a do–it–yourself guide to compiling a psychological profile of a company or other organisation.

The first essential step is to define what constitutes a healthy corporation. In the light of the issues discussed in this book, a useful working definition is that a healthy organisation is one that:

* Sees itself clearly

* Sees its customers clearly

* Portrays itself truthfully

* Deals openly and honestly with criticism

* Treats its employees fairly

* Shows no obvious signs of irrational behaviour

* Does not handicap itself unconsciously

* Is not afraid to innovate or afraid to fail

* Does not owe its success to factors beyond its control

* Is not trying to repeat the past instead of facing the future, but is managed rationally and efficiently.

Anyone can get a fair idea of these ten key diagnostic criteria of psychological health simply by looking systematically at the clues that organisations provide in their everyday behaviour – the things they say; the things they do; the products or services they market; the actions and attitudes of the people who work for them – and by interpreting those signs in the light of the unconscious factors discussed in this book.

The following is a checklist of diagnostic criteria for telling the healthy organisation from the unhealthy.  The suggested points scoring system is a simple way of quantifying each of the criteria and hence of getting some idea of how, overall, a corporation shapes up in comparison with its peers.

There are many sources of corporate and institutional data that can be searched for the answers to these diagnostic questions.  Probably the easiest source is the Internet since, today, every commercial company and other institution has a web site which, typically, publishes an annual report and recent press releases.  It is, of course, still possible to obtain a copy of practically any company’s annual report by writing or telephoning its public relations department to ask for a copy.  And the Department of Trade and Industry has a commercial library which is open to everyone and which contains copies of most annual reports and other information.

How does the organisation see itself?
We’re not, of course, interested in the company’s conscious estimate of itself – the kind of guff talked in its press releases and annual report – except in so far as those PR statements can occasionally provide unconscious clues to the company’s real nature and motives. What we are looking for are obvious signs of self–delusion.

The tell–tale signs here include the impossible promises in corporate mission statements (‘Our goal is total customer satisfaction’ and the like) and the phoney, meaningless corporate slogans (‘When all you want is everything’, ‘Whatever it takes’, and other such drivel).

Of course, the fact that a company has fallen victim to this kind of marketing–speak doesn’t mean that it believes these statements or even necessarily that it has gone to the bad.  But it does show clearly that the organisation’s board is careless of its corporate image and has allowed it to fall into the hands of outsiders.  This is a warning signal of a self–deluding company: if they are willing to buy into these superficial slogans, then they no longer have a firm grasp on who they are and what they do.  They have begun to confuse images with reality. And they are weak–minded enough to be dazzled by clever words.

Score 10 points if the company has a ‘mission statement’, and an additional 10 points if it uses a corporate slogan on its advertising or as part of its corporate livery.  Score a further 10 if either or both of the statements are obvious nonsense or laughable.

How does the organisation see its customers?
The annual report tells you a great deal about how the organisation sees its customers and its shareholders. Is the report frankly informative even about the bad things?  Or is it full of weasel–worded evasions and attempts to gloss over bad news?

Does it leave out entirely the things the company does not want its shareholders and customers to know about?  Even worse, is the company trying to cover up such matters by claiming they cannot be talked about because they are ‘subject to legal action’ (this is almost never true)?  If the corporation has adopted any of these ‘information management’ strategies rather than an open approach, it means that the company sees its shareholders, customers – and even its own staff – as outsiders who can’t be trusted to make up their own minds on the facts.

Make a comparison of the problems the company has encountered during the year as reported in the press and as they themselves have reported them to the financial community.  Have they grasped the nettle, come clean and told their shareholders about the marketing failures, the redundancies, the dangerous products that had to be recalled?  Or have the nastier events been wrapped up in weasel words and hidden away in an inconspicuous corner?

If it’s the latter, then the chances are the company is afraid to tell the truth because it is afraid of how we will react when we know the truth, unless they have pre–digested it for us.  This is not a basis for an equitable relationship.  It is another warning signal of dangerous personality weaknesses. Score 10 points for every major black mark that is glossed over and 20 points for any that are omitted entirely.  Score another 10 if the omission is claimed to be ‘for legal reasons’.

How does the company portray itself?
Take a close look at the organisation’s advertisements and ask: what are they really saying?  Are they trying to make people believe things that simply aren’t true – perhaps things that the organisation merely wishes were true?  Are they trying to depict what The Independent called a ‘rosy and uncomplicated picture’, and if so, then why exactly?

It is not pathological for the company to seek to make a legitimate profit and to indulge in a little creative exaggeration to help it along.  But if the content of its advertisements is the opposite of the truth, then something is deeply wrong.  Car exhausts do not make pretty wildflowers grow on the roadside: they poison the environment.  So why do some car manufacturers seek to show in their advertisements that their vehicles have this beneficial affect?  The only explanation can be deception.  A company that thinks it can con its customers like this, thinks it can con anyone about practically anything: it is not an organisation that can be trusted to think straight.

In many cases, the organisation and its agency realise that it would be going too far actually to claim the opposite of the truth.  It would, for example, be laughable today to claim in print that smoking was good for your health (as some tobacco advertisements attempted to do in the 1950s) because this would be perceived immediately as a lie.  In such cases, companies sometimes merely attempt to show the lie rather than tell it directly, for example by showing a healthy–looking cowboy enjoying a cigarette in beautiful open country, or – now that the cowboy has died of lung cancer – simply the beautiful countryside.

Score 10 points for every attempt to deceive by stating, or showing, the opposite of the truth.

How does the company deal with its critics?
Every large organisation has critics amongst environmentalists, consumers and other organisations and individuals with grievances.  Do they respond openly to such critics, meeting them with honest, open debate?  Or do they refuse to acknowledge and deal with external criticism, resorting to the usual PR formula of soft–soap, denials and rationalisations?  Worst of all do they attempt to squash debate about their commercial practices by threats of litigation or actually resorting to the law?

If a company has ever issued writs for libel against national newspapers or television companies, or repeatedly done so against private individuals such as environmentalists or consumerists, this is a very significant sign of something seriously wrong.  Regardless of the outcome of any such litigation, always treat a company that resorts to libel litigation with deep suspicion.

Do not be overly concerned simply because a company is made the subject of an adverse report by newspapers or television.  Reporters are often approached by people who believe they have been wronged or believe that a company is behaving irresponsibly.  It is the function of the press to investigate allegations of this kind – they make good stories – and being bad–mouthed by the press is part of the price of being in the public eye.  There is only cause for concern if the company clams up, refuses to comment, or threatens the media for doing its job.

Score 50 points for every libel writ issued by the company.  Score 20 points for every important occasion on which the company refuses to participate in or comment on an investigative film or story.  Score nothing for merely being written about or featured on TV in a bad light, if the company defends itself rationally.

How does the company treat its employees?
Most large organisations observe good form, at least outwardly, when it comes to treating their employees well, because they are acutely aware of the possible consequence of failing to, so don’t expect to find any obvious signs of maltreatment.  Just as companies no longer send small boys up chimneys or work pit ponies to death, neither are they deliberately careless of safety or welfare issues in their clean, comfortable, well–lit offices.

A bad record of industrial relations is not by itself cause for concern because permanent bickering is sometimes the most effective method of survival for both management and staff – as used to be the case in mining and car manufacturing for instance.  However, a record of strikes is a sign of deeper trouble.

A sign of an even deeper malaise is where there is serious industrial unrest and strikes in third world countries in which the company operates.  Workers in such countries are so ill–protected and unemployment is usually so high that striking is a sign of desperate measures.   If a company is behaving badly to workers in the third world, it will often try to excuse its behaviour by claiming that it is the local conditions that produce such a state of affairs, rather than the company’s policies.  The truth is that if British workers were without a century of legislative protection, then the company would treat them the same way as it treats its workers in Nigeria or Guatemala.

You can find out about industrial relations both at home and abroad by contacting the half dozen or so biggest unions who will have prepared literature on the company if it is a persistent offender.

Score 10 points for every strike at home and 50 points for every strike in a third world country.

Does the company show signs of irrational behaviour?
This is by no means easy to spot but is made easier by the knowledge that such behaviour is possible.  In the past, episodes such as those described in previous chapters were regarded simply as errors of judgement or marketing mistakes, rather than seen as outbursts of disturbed behaviour caused by unconscious motivations.

The thing to look for here is the unaccountable.  If the company has made a major investment decision that is inexplicable in terms of normal business practices, that decision should be examined with extra care to see if it is not simply an example of irrational behaviour.  There are several common tell–tale signs that something is wrong.  One is when the company is behaving in a way that is in opposition to the course of action that most rational outside observers expect it to behave. Another is when the organisation digs in its heels and stubbornly refuses to reconsider its position, even when most outside observers consider that it is foolish or self–defeating for it to persist in its chosen course.

Care must obviously be taken not to attribute irrationality to actions that are merely imaginative, innovative or unconventional.  No organisation should be penalised merely for attempting new goals or using new methods of achieving them.

Score 50 points for each example of undoubted irrational behaviour.

Is the company afraid to innovate or afraid to fail?
How good is the company at picking winning products or services?  Or at seeing what customers want and anticipating demand?  How many successful new products has it introduced in the past year or two?  And how many serious turkeys?

Innovation is a tightrope and companies can fall either side.  If they are chronically bad at growing or finding successful new products, then their future is bleak. This is especially true if large amounts of their revenue are being swallowed up in research and development investment that is not paying off. On the other side, the company’s future is equally bleak if it is continually innovating and continually failing to find a winner – once again made worse if R and D spending is excessive.

This ‘innovation tightrope’ cannot be quantified simplistically but a rough guide is as follows.  If a company is spending more than 10 per cent of its revenue on research and development, then it should also be regularly innovating products that are capable of contributing substantially to profitability for a reasonable time (more than a year, say).  If it is persistently innovating but the new products do not meet these criteria, then something has gone wrong. If it is spending this much on R and D and not innovating regularly, then something has gone wrong.

For failure to innovate significantly despite spending 10 per cent of revenue on R and D, score 20 points.  For persistent failure of innovations despite spending 10 per cent of revenue on R and D, score 20 points.

Another important danger signal is excessive spending on marketing activities: advertising, public relations, direct mail, give–away gimmicks and the like. If the company is spending significantly more than 10 per cent of its revenue on marketing, then suspect the worst and look carefully to see if it is simply going on a spending spree to make itself feel good.  For excessive marketing spending score 20 points.

Is the company managed efficiently?
In judging whether a company is managed efficiently, there is little to be learned merely from how financially successful it is. The key question is not: is the company financially successful?  but rather: does the company owe its success to factors beyond its management’s control? As discussed earlier, factors that actively stimulate management delusion can include: possession of a monopoly or near monopoly; an insatiable demand for the company’s products or services; or having very low costs in relation to prices, for raw materials or labour.

The fact that a company enjoys a naturally high volume of sales and a high margin on those sales does not mean that its management is lazy or inefficient, but it does mean that the conditions are right for management inefficiency:  it is therefore a useful warning signal of possible delusional corporate behaviour.

When evaluating what companies are really like, by all means examine the usual financial indicators, such as return on capital employed.  But ask also how far the company conforms to the model described above. On a scale of 0 to 20, how much of a monopoly does the organisation have?  On a scale of 0 to 20, how insatiable is the demand for its products or services?  On a scale of 0 to 20, how high is the margin between what the organisation buys and what its sells?  Convert your estimates directly to point scores.  This last indicator can be tricky to estimate, especially for service organisations.  Note especially that this is not synonymous with the company’s reported profit margin.

How to score
In general, the closer to zero a company scores, the healthier it is.  Conversely, the higher its score, the more likely it is to be untrustworthy or otherwise a bad bet.

Remember that this is not a precision instrument, merely a rule–of–thumb means of gauging the level of selfishness a company exhibits and hence of telling whether it is nearer to the socially–friendly end of the spectrum or the socially–unfriendly end.

Weighting the results
Some allowance must be made for size and type of organisation.  For example, the British Government employs so many people (more than 600,000) in so many different fields that it is bound to have many strikes each year (not to mention the fact that it is also a goldmine of examples of irrational behaviour).

It is thus advisable to consider multinational companies or very large organisations in smaller (perhaps country–sized or department–sized) units, except where their global activities are specifically in question (such as number of strikes in third world countries).

Less than 50 points
All companies are going to clock up a few unwelcome points at some time or other.  A company that can score less than 50 or so is doing extremely well to remain relatively well–balanced and customer–friendly in such a tough, competitive, corporate environment.  You can deal with this company with as much confidence as you would ever place in any commercial organisation.

50 to 100 points
This is probably where the majority of organisations are today, and is a reflection of how competitive trading conditions are, how little escapes the media’s attention and how demanding we have become as consumers.  Be a little wary of companies scoring in this range: don’t believe what they say unless they can prove their words; don’t part with any significant money for their products or services until you have investigated your intended purchases with extra thoroughness.

100 to 250 points
There are far too many companies in this category today; a fact that gives cause for concern.  Companies in this category are untrustworthy too often in what they say and do; they are unlikely to stand behind their products or services to any serious extent if anything goes wrong; they will often try to weasel out of trouble unless they are compelled by the press or the courts to face up to the consequences of their actions.  Deal with such companies only after exhaustive investigation or if you have a cast–iron contract.  If you can get the same or similar product or service from another organisation with a lower point score, then do so.  Deal only with companies in this group if you have no alternative or are able to satisfy yourself completely that the transaction will be to your benefit.

Put simply, make sure they can’t gyp you, before parting with your money.

More than 250 points
Any company scoring significantly more than 250 is likely to have very serious problems and should be avoided completely.  You cannot rely on this company at all and, even if its products or services are sound in themselves, they are being marketed at unacceptable cost to the community, so the organisation should not be encouraged to continue its present patterns of behaviour.

Spend your money elsewhere and help shorten the life – or change the behaviour – of these Bad Companies.

 

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