Strategies for a discontinuous future.

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A Theory Of Strategic Justice:
Google, Evil, and Competitive Advantage

(With Apologies to John Rawls)

‘You can make money without doing evil' – Google True Thing No 6

I’ve been thinking a lot about the corporation of the future lately. I think the corporation of the 21st century will look and feel very different from the corporations of the industrial age, or even the information age, which is really just the economic acceleration of the industrial age in space and time.

We’re seeing the first glimmerings of new forms of corporate organization. I’m loath to call them ‘corporate’, since these new forms defy the implicit (and extreme) distaste many people feel for the very word ‘corporate’. One of the most important transitions for ‘corporations’, then, is going to be shifting executives from managers to purpose-makers (to use Jeff Mills’ turn of phrase).

This may strike you as a ridiculous claim. How can managers create any kind of purpose? In my opinion, there are many, many ways – and for business to survive, the transition is not just sufficient, but necessary.

Let me start with one of the concepts that’s been on my mind for a while. When I came across Google’s software principles, it struck me that they what they really are, in sociological terms, are a proto-constitution – a great example of something I’ve what I’d like to introduce you to: the notion of a corporate constitution.

Every corporation – indeed, every organization – has a constitution, whether it’s explicit or implicit. Some are nasty; some are fair; some are inclusive; some are not. The point is that every organization you or I have belonged has had a fundamental organizing principle that defines the rights of the organization’s stakeholders – a constitution.

For most corporations, constitutions are implicit. Don’t confuse constitutions with the vague ethics statements most corporate boards and c-level executives pay copious amounts to have written. As many suspect, those are largely meaningless in the real world, because they define vague ‘ideals’ that the corporation might aspire to in an ideal world. But in the rough and tumble of the down and dirty world of business and innovation, ideals are quickly forgotten.

What most corporations turn to, then, is their implicit constitutions: the set of beliefs the organization’s evolved which govern the rights of it’s stakeholders. But implicit constitutions pose a very difficult problem for corporations.

First, they often stay static – or even decay – rather than evolve. That’s because there’s no way to generate the option to institutionalize them. That means they cannot be reviewed, challenged, or changed unless those at the bottom coordinate – but since there is often nothing of substance to coordinate against, such revolution rarely happens. So what we have is a rigid structure of beliefs that can only change in limited ways.

And here’s the heart of the problem: it’s intuitively obvious that in fast changing environments, rigid mechanisms and beliefs are absolutely maladaptive. They force organizations to move backwards, or, at best, not at all. Now, more than ever, explicit constitutions can provide massive strategic leverage and create substantial value, by sharpening and honing the firm’s activities and resource accumulation mechanisms according to the beliefs and expectations it’s stakeholders hold about their costs and benefits.

Viewed this way, constitutions are not simply boundary-definers – they’re guiders. Constitutions are value creation mechanisms. Because constitutions can allow the firm to define and redefine rights in a way that creates more value than otherwise, they are a strategic tool firms can use to guide themselves in turbulent environments.

OK. This is all pretty abstract. Let’s pause for a minute to examine it. What should be in a constitution? I’ve said rights allocations, but what does that mean? That means principles backed up by positions – where your particular organization feels who should have the right to do what.

If you think about it, Google’s software principles list is a first step towards exactly that. Few will deny that Google’s ‘do no evil’ principle has played the defining role in providing a strategic vision which links and guides it’s resources and competences. But this principle is really Google’s constitution: it defines always and everywhere the rights of Google’s stakeholders: customers, suppliers, competitors, complementors, and employees.

In fact, imagine the counterfactual: Google with great technology and usability resources, but little care devoted to whether they did ‘evil’ or not. In short, Google without a constitution. Put a bit more technically, without a constitution, how would Google’s management have been able to translate it’s value creation mechanisms into a strategically revolutionary and ultra-successful business model? Clearly, the strategic outcome for a Google without a constitution would have been very different.

Now, the really interesting bit is that it’s as if Google’s Ethics Committee, when writing their list of principles, used Rawls’ well-known notion of the Veil of Ignorance. Here’s a brief definition I grabbed from the Net, in case you’re not familiar with it:

“Step behind this veil. Imagine that you are ignorant of yourself, your natural abilities and social position. Knowledge of personal racial, sex, national or other interests and commitments cannot then influence your judgement. You become…a rational, free, and morally equal being”
Now, every one of Google’s principles is consonant with Rawlsian justice. Indeed, maybe the Veil was used. But no matter – the point is that it’s interesting because Rawls devised the Veil of Ignorance as a thought device to understand and eliminate social injustice – but Google applied it (implicitly or explicitly) as a strategic device to create massive competitive advantage.

It’s exactly such a tool, I argue, that corporations – and bloated corpocracies – must begin to use to complement well-understood strategy heuristics like structural analysis, competence and resource analysis, and the various matrices consultant throw around.

What do I mean? Clearly, I don’t mean a naïve application of Rawlsian Justice to corporations. I mean almost the inverse. Decision-makers can (and should) put themselves behind a Veil of Strategic Ignorance. OK – I agree: that’s an absurd looking concept, at least on paper.

Pause for a second while I explain (and try and think of a cooler name), and let’s then think about the power of the concept. A Veil of Strategic Ignorance means that a decision-maker looks at the consequences of his decisions from the point of view of a pure stakeholder. By pure stakeholder, I mean someone who is 100% a shareholder (if the company has shareholders), 100% a manager, 100% a customer, 100% a supplier.

What would the impact of this be? First and foremost, to cause decision-makers to think about what they are managing, and for whom it is managed. For example, the practice of earnings ‘management’ – now an easy target, but for close to 20 years, management innovation, and then orthodoxy – can immediately been seen to be a disastrous practice, especially when pursued strategically.

How would this happen? Let’s examine how The Veil of Strategic Importance works. To employ it, we must put ourselves in the shoes of managers, and try and understand how stakeholders will make decisions about allocating their rights to firms. Stakeholders in firms will, presumably, make rational decisions about their rights. That is, they will only grant their rights to the corporation’s decision-makers if it’s rational: if the action associated with the rights gains them more in the firms’ hands than it costs them. This is in fact the late great sociologist Jim Coleman’s definition of Rawlsian justice in an organizational context.

In this context, the crucial variable is the costs imposed by management – ourselves. These are costs that are imposed upon you, as an imaginary stakeholder, because of the firm’s other actions – the ones you wouldn’t take yourself. These are simple externalities. For example, earnings management imposes great costs on certain kinds of stakeholders, but not on others. Options grants impose great costs on certain kinds of stakeholders, but not on others.

If, in fact, stakeholders are rational, the Veil lets managers understand that over time, and in the aggregate, attempting to ‘manage’ stakeholders is a dominated strategy. That’s because stakeholders will, on average, defect to other firms when the costs imposed by the incumbent become greater than the costs imposed by rivals. In the extreme case, lying to stakeholders is a pure cost – but even the management of expectations, as we have seen in practices such as earnings management, imposes large costs on stakeholders. So stakeholders will always defect from traditional ‘managers’, as long as there are less ‘evil’ rivals around.

In fact, what we end up with, after iterating the Veil across stakeholders, is the rough analogue of a minimax strategy of rights allocation: one where ‘only those inequalities are just which operate to the benefit of the least advantaged’. In our case, we are considering inequalities not among members of society, but corporate stakeholders. Of course, a Veil of Strategic Ignorance doesn’t have to be strictly Rawlian – it may define stakeholders in other ways, or it may hyperbolically discount future cost and benefit, etc, etc. No matter – the point is that the Veil is a tool which organizations can use to make constitutions explicit, help guide strategy and decision-making, and stave off strategy decay by ensuring that beliefs and rights definitions don’t ossify with age.

Why will using such a tool to shape rights allocations create revolutionary and game-changing strategies? I think the reason’s pretty simple: because it at once expands the manager’s search space and narrows down the solution space. That is, by letting managers know what their stakeholders think will create value, constitutions provide both information and search economies in decision space. At heart, constitutions make difficult strategic decisions not just easier and simpler, but most importantly, better aligned to link value creation to value delivery – to link resources and competences to the business model.

I’ve tried to argue here that corporate constitutions based on theories of stakeholder justice are not just matters that should be relegated to ‘ethics committees’ – in fact, they’re increasingly vital tools for strategic thinking. They do what few strategic heuristics and frameworks are capable of in a world of growing hypercompetition, hyperimitation, and discontinuity: they unerringly guide decision makers towards defensible sources of value from which to craft revolutionary strategies. But more importantly, they define and shape purpose – which is, and always has been, the only mechanism for going beyond market advantage.

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