It is commonplace that individuals and the companies they represent over-commit, over-sell, and over-promise in an effort to make a sale, and in a broader context to steal a march on the competition. And, while self-interest shall remain forevermore the primary motive of human behavior, acting on ethical principles has been demonstrated to be good for the individual and therefore in the best interests of the organization.

When behavior to misrepresent a customer is acted out knowingly it creates a moral hazard that an executive leadership group driven by an ethical construct that goes beyond a fixation with the bottom line can not countenance and must move to stop dead in its tracks. A moral hazard arises, therefore, when a party to a transaction acts in bad faith knowing full well that the risk of such an action is borne by another party. A moral hazard taken to an extreme can lead to criminal behavior.

A MORAL HAZARD LIKE NO OTHER

I wrote about what perhaps was the most egregious ethical failure ever visited on the largest number of consumers when I discussed the subprime mortgage fiasco in America’s Service Meltdown. I’ll quote directly from the book. “The subprime mortgage crisis which began in 2007, racked up roughly $200 billion in defaulted mortgages. The crisis also violently convulsed the credit markets. Fannie Mae and Freddie Mac, government sponsored enterprises chartered to provide a stable supply of mortgage money for home buyers, sucked in $200 billion in order to remain solvent. The consequences of the crisis were so widespread that it could not spare many of the presumed titans of Wall Street: Bear Stearns, one of the largest underwriters of mortgage bonds, was bought by JP Morgan Chase for approximately seven cents on the dollar. Washington Mutual, the nation’s largest savings and loan, was also bought by JP Morgan Chase, for approximately three cents on the dollar from its price a year before. Merrill Lynch was bought by Bank America in a shotgun wedding over a weekend (facilitated by much strong-arming by the federal government, the deal was approved by shareholders who were falsely told that Merrill Lynch executive bonuses of as much as $5.8 billion would not be paid without the bank’s consent when in fact the bonuses had already been authorized). AIG, the largest insurance carrier in the nation with much of its portfolio in mortgage-related products, and a casino operation that hedged exotic debt instruments, had to be bailed out with a $180 billion loan by the federal government (ultimately repaid by AIG including a $23 billion profit to taxpayers). And, Lehman Brothers, one of the most exposed banks to the subprime mortgage market, went out of business after 160 years.”

Moral hazards were on display during the subprime mortgage debacle courtesy not just of greedy financial institutions but of others as well: Home buyers lied about their incomes and lived beyond their means; mortgage brokers were incented to sell high-risk mortgages and did so with abandon;  mortgage underwriters processed applications without full documentation so as to score big production numbers; regulators lowered capital lending requirements, and overrode anti-predatory state laws; credit rating agencies rated mortgage-backed junk as AAA securities, and so forth.  The real estate bubble, fueled by artificially low interest rates, gave all the players a “high” who became giddy with their own success. Whatever the attribution of the crisis is assumed to be, however, in the end it was a failure to serve the consuming public.

Similarly, Rick Singer, the fraudster behind the college admissions cheating scandal, which culminated in the indictment of over fifty people, was hardly alone in his role depriving hard-working and honest students of a chance to be legitimately accepted to college. Test administrators, athletic department staff, coaches, and parents were all complicit in what federal investigators say was the largest college admissions scandal ever generating millions of dollars for the scoundrel Singer.

There is always the potential to give rise to a moral hazard anytime one party to a transaction has an incentive to behave against the interests of another party. Moral hazards can be mitigated somewhat by regulations but, in the end, regulation spells out the lowest common denominator of acceptable behavior. And, besides, regulations do not provide enough of a deterrent to keep crooked individuals on the straight and narrow. Consider that only one Wall Street banker went to jail for fraud (although lesser luminaries did end up in the slammer and some are still behind bars). In most recorded cases of fraud and abuse, it’s important to remember, there were laws on the books to preclude the offensive behavior.

Moral hazards can also be mitigated by the presence of contracts that are fair and balanced and which give as much as they take. Unfortunately, the preponderance of marketplace transactions is essentially one-way and invariably favors the supplier. I had a client that commissioned a third-party software contractor to build an e-commerce portal. Unfortunately, the contract was written in such an abstruse and recondite way that not even my client’s legal counsel picked up on the fact that the contractor was not writing the software code as a “work for hire.” Which is to say that my client, for practical purposes, had no ownership rights to the software. It wasn’t until my client had spent serious sums of money developing the portal that my team discovered the contractor’s sleight-of-hand. In the end, my client had to litigate the matter and incur significant legal costs. Finally, the admonition to the consumer of caveat emptor is helpful but hardly practicable in the rapid-fire of day-to-day commercial transactions.

THE SERVICE ETHIC: AN OBVIOUS SUPPLIER OBLIGATION

The acts of fraud and abuse perpetrated by corporations and others are the result of individuals operating in an ethical vacuum. All of the regulations in the world, therefore, will not prevent fraud. Remember, there were plenty of regulations in place at the time of Bernard Madoff’s fraudulent scheme. Similarly, there were regulations in place at the time of Enron’s fraud. In that case, CFO Andrew Fastow chose to break the rules with his financial shell game. And, Elon Musk, CEO of Tesla Inc. knowingly flouted the SEC’s financial disclosure regulations for his own aggrandizement.

The consequences of ethical misconduct are real and severe and will, in time, doom the mightiest enterprise. Adelphia Communications, Arthur Andersen, Tyco, Qwest, Wachovia, and WorldCom are but a few of the names which were eventually cut down to size for their continued arrogance in the face of flagrant moral, and ultimately illegal, misbehavior. Unfortunately, the comeuppance suffered by these malefactors is little consolation to those individuals who lost their jobs, their homes, and their hard-earned life-savings at the hands of these unscrupulous predators.

Still, the depredations continue. As one contemptible example, Wells Fargo was ordered to pay $185 million in fines and penalties for opening unauthorized deposit and credit card accounts. More recently, the bank was slapped with a civil penalty of $1 billion by the Consumer Financial Protection Bureau (CFPB) for mortgage interest rate fraud and for forcing nearly two million customers to buy unnecessary auto insurance. Wells Fargo seems to revel in a culture of deceit and appears hard-wired to cheat. Since 2000, according to Violation Tracker, a search engine focused on corporate misconduct, Wells Fargo has been fined nearly $11.5 billion for sixty-one different abuses. This, from a “too big to fail” bank that cost taxpayers $36 billion in bailout funds. Clearly, Wells Fargo has never been too big to cheat.

Another example of ethical misconduct involves Facebook. The company’s default privacy settings and use of personal data have been found to be illegal by a German court. It is estimated that over 50 million user names were sold by Facebook to various providers. Legalities aside – Germany has very strict privacy prohibitions compared to the United States – what is disgustingly unethical on the part of Facebook is that the fine print of its Terms and Conditions was purposely recondite to allow the company to “infer” the user’s permission to share private data. But what is most unconscionable is that Facebook’s Founder and CEO, Mark Zuckerberg, on numerous occasions has publicly stated that the company “will never sell your information without consent.” Mr. Zuckerberg’s execrable behavior, in effect, gives a green light to others in the organization to lie and cheat as the boss would have it.

Not to be left behind is Uber’s cover-up of a hacker’s breach which amounted to the theft of the personal information of approximately 25 million customers and drivers. Instead of reporting the breach to authorities, which is required by law, Uber chose to keep the matter hush and pay the hackers a ransom thereby risking additional fraud and theft. In the end, the subterfuge cost the company a settlement of $148 million. Incidentally, Uber’s misconduct in that case followed on the heels of the Federal Trade Commission’s (FTC) $20 million settlement with the company for making misleading income and lease agreement claims to its drivers. So much for ethical leadership.

The onus to treat the consumer fairly rests squarely with the supplier. That is obvious and true if at times rarely practiced. But that obligation is underscored if the organization abides a service ethic. The Service Ethic, as I have formulated it, are those principles and practices that govern how individuals and their organizations behave toward the customer. The Service Ethic rests on three pillars:

1. Craft a mission to serve the customer. Articulating a mission is a most important first step in focusing the organization’s principles and practices. The mission must be clear, unambiguous, and succinct in stating that “customers are first.” I have used that opening salvo in the mission statement of all of my companies so as to leave no doubt what we valued most dearly. And, as confusion reigns supreme in many circles about what constitutes a mission statement versus a vision statement the following distinction is my take on the difference: a mission statement is how you want to run the company; a vision statement is an expression of reach which lies beyond the company’s current grasp. A statement that expresses the company’s desire to garner, say, 20% of the market is a prototypical example of a vision statement.

Commitments to employees, stockholders, and other stakeholders although clearly important in their own right cannot purport to represent the raison d’être of the corporation. To serve the customer and the marketplace is the principal reason for the corporation to exist and it must trump all other considerations.

2. Reinforce the mission operationally. Service-leadership responsibilities must be consistent with the mission while being grounded at the operating level. By way of examples, the leadership must follow through on the following: 1) hire service-smart workers, 2) empower workers to act in the customer’s behalf, 3) provide workers with a program of continuing education geared to new product and service offerings, 4) support workers with information systems geared to interact with customers effectively and efficiently, 5) incent service workers with the appropriate tangible and intangible rewards, 6) ensure public and private messaging does not subvert the mission, 7) take remedial action with intransigent workers, and 8) allow whistleblowers the freedom and protection to sound the alarm when something seems untoward.

3. Abide the Golden Rule of Service: A worker’s correct ethical choices should be grounded on the following two propositions, neither of which can be implied to bring harm to others: 1) “Do what you say you are going to do”, and 2) “Don’t do what you say you are not going to do”. And, yet this simple formula is systematically flouted by most organizations. Adherence to these propositions – admittedly, more easily said than done – speaks tomes to the character of the individual and his organization. A failure to abide by these propositions while making excuses or lying about why a stated promise wasn’t kept gradually erodes the goodwill that has been built with the customer or keeps customer goodwill from being established in the first place. Moreover, being faithful to a promise or commitment made to a customer isn’t just good business – which obviously it is – but it is virtuous behavior which should comfort the responsible individual.

It is gaining more and more currency that consumers focus as much on the integrity of their suppliers as on the quality or price of their products. It is a visionary executive leadership group, moreover, that understands that service excellence driven by an unremitting adherence to the Service Ethic can prove an unassailable competitive advantage in the twenty-first century while enhancing the moral standing of the corporation. The reach of the Service Ethic extends far beyond mere legalities. As the great German philosopher Immanuel Kant said, “In law, a man is guilty when he violates the rights of others. In ethics, he is guilty if he only thinks of doing so.”  

What can I believe? This is a familiar lamentation by consumers when confronted by the product and service claims made by firms of every size and stripe in the marketplace. Nearly sixty years ago, historian Carl Becker in his book, Freedom and Responsibility in the American Way of Life, madethe following claim: “No one can deny that much of our modern advertising is essentially dishonest…” Becker also saw the tension between freedom of speech and freedom of lyingand believed that corporations should have the latter freedomcurbed. Apparently, not much has changed in this regard since Becker’s time.

Comcast Corporation’s slogan, for example, that “Technology and innovation have always been at the heart of what we do” is a less than artful rhetorical spin since the conclusion is obviously embedded in the marketing claim. How many consumers are taken by the slogan is hard to tell but the company seems to double down when making a commitment to its customers that it will: 1.”respect your time, 2. simplify your experience, and 3. make things right if we fall short.” If the slogan is inartful, the “commitment” is gibberish and obviously counterfactual. Again, what impact this has on the consuming public is hard to tell.

What is not hard to tell is that in J.D. Power’s rating of major wireline services, the company received the worst scores in cost to consumer, performance, billing, and reliability. It is little wonder that the Federal Communications Commission has seen fit to fine Comcast $2.3 million over allegations the company charged customers for services they never received. Yet, Comcast remains the number one provider in total broadband connections with over 24 million subscribers in the United States. And, as larger and larger swaths of the country become cable monopolies – in my area, the non-Comcast provider’s maximum available download speed is nowhere near the FCC mandated broadband standard of 25Mbps – there may be reasons to forgive the company for its amateurish marketing messaging.

RHETORIC HELPS TO VEIL FALSE CLAIMS

Aristotle teaches that rhetoric as a form of persuasion relies on three basic appeals: 1) ethos, persuasion based on the character or celebrity of the speaker delivering the message, 2) logos, or persuasion based on logic and facts, and 3) pathos, a reliance on emotional or humorous stirrings.

We are predisposed to believe a message when it is delivered by a known, credible, or celebrity figure. This is especially true if the facts surrounding an issue in question are unclear. Still, it is axiomatic that the rhetor – the   speaker presenting the claim – has a clear path of authority on the subject.

William Devane, the star of stage, television, and Hollywood films is an engaging pitchman for Rosland Capital, a company which trades in gold and other precious metals. Mr. Devane carries himself well and projects a likeable persona in his commercials for Rosland. Mr. Devane suggests in a commercial dripping with pathos – the Battleship USS Iowa’s menacing 16-inch guns are in the background – that “there are forces everywhere pulling our country apart, threatening our economy and our way of life.” Mr. Devane’s solution? Buy gold.

To the best of my knowledge, Mr. Devane is not a precious metals investment guru. If he is, he doesn’t say so in the Rosland commercials. Further, his pop-culture celebrity can hardly obscure the facts. Gold, it turns out, has been a ho-hum investment. In the period 1986 to 2016 the annual rate of return of gold, with inflation factored in, is an unimpressive 1.3% per year. More perplexing, is the choice of an octogenarian to pitch gold. Presumably, Rosland is aiming at an older demographic with Mr. Devane as its spokesman. Given gold’s snail’s paced growth over the last thirty years, however, the metal seems hardly a worthy investment for a senior citizen. This and other Rosland commercials fail to carry their claims based on an appeal to facts and logic.

In my experience, the vast number of public utterances, declarations, and slogans coming from companies both large and small on the subject of customer service – if not all claims having to do with a product’s presumed prowess – is rarely rooted in fact. Little has changed since 1957 when Vance Packard wrote the immensely popular book, The Hidden Persuaders. In that book, Packard stated that we rarely buy products and services based on logos – that is, the intrinsic qualities of a product or service. Rather, that we fall prey to appeals that play to our emotions.

JetBlue Airways’ Customer Bill of Rights states that the company “… is dedicated to inspiring humanity.” The company further states in its financial report that, “One of our competitive strengths is a service-oriented culture grounded in our five key values: safety, caring, integrity, passion, and fun.” The company’s grandiloquence aside, this is the same airline that kicked a couple, accompanied by a small medical alert dog, off a flight because the passenger’s doctor’s notice – dutifully signed, on letterhead, and with the physician’s contact information – was not typewritten! Now, that kind of service behavior is sure to inspire humanity.

“EXCELLENT CUSTOMER SERVICE IS OUR HALLMARK”

Wachovia Bank, once one of the largest banks in the nation, publicly, and with great fanfare, announced that it had made an investment of $100 Million to upgrade frontline staff to better serve its customer base. Crowing about the recently released American Customer Satisfaction Index (ACSI), which showed Wachovia was ranked the number one bank for customer satisfaction, its chairman and CEO, G. Kennedy Thompson, had this to say: “Providing excellent customer service is a hallmark of our company, and this award is a testament to our success.”

Meanwhile, the bank was processing unauthorized, unsigned check transactions from thousands of accounts; representing auction-rate securities – complex, illiquid debt instruments – as alternatives to liquid money-market funds; ignoring anti-money laundering federal guidelines; and selling negative amortization mortgages whose principal balance would increase if the customer chose the lowest payment option available. In the first instance, court documents show that bank executives knew of the fraudulent scheme that allowed telemarketers to steal hundreds of millions of dollars from unwary depositors but failed to stop it. The reason: telemarketers were a huge source of revenue for the bank. As to the bank’s sales practices of auction-rate securities and negative amortization mortgages, and its disregard for money laundering safeguards it is clear the intent was to deceive the consuming public while feathering its own nest. So much for “customer service as a hallmark.”

Wachovia’s experience is proof positive that clichés and slogans alone won’t cut it. In April 2008, Wachovia agreed to pay $144 Million to settle claims that it allowed telemarketers to bilk depositors. In June 2008, Mr. Thompson was ousted. In July 2008, the bank eliminated 11,000 jobs. In August 2008, regulators forced the bank to buy back $9 billion of auction-rate debt, pay a $50 Million fine, and make no-interest loans to consumers hurt by the fraud. In October 2008, the bank a victim of the subprime mortgage implosion it had a huge hand in inducing, got its comeuppance for its systemic cheating as it was picked over by both Citigroup and Wells Fargo. In the end, Wells Fargo – a prodigiously unethical financial institution – prevailed by offering $11.7 billion for a bank that was worth ten times that amount only one year earlier.

Oh, and what about Wachovia’s number one ranking for customer satisfaction in the ACSI survey? It turns out that on this occasion the ACSI survey only covered five banks – this, out of a bank population of roughly 7,000 banks in the United States at the time of the survey. Most egregiously, however, the bank’s mortgage, investment, and brokerage customers – the source of many of the bank’s major transgressions, aside from money laundering and unsigned check fraud – were not included in the ACSI survey. So much for a number one ranking!

Wachovia’s profound disregard for the customer is perhaps epic but lest consumers think this is a one-off episode consider that every claim from the niggling – Blockbuster’s “no late fees” acclamation which proved to be false – to the tragic – Bernard Madoff’s “I made a lot of money for my clients” when, in fact, he was running a scheme Charles Ponzi would have been proud of – Ponzi apparently swindled clients out of $7 million when he was finally apprehended in 1920 and which even in today’s dollars would amount to a pittance compared to what Mr. Madoff swindled from his clients. Tragically, multiple investors struck with the horror of their losses took their own lives, including Mr. Madoff’s son Mark. In the end, the onus rests on the consumer to reach for the logic and facts of a supplier’s service claims.

During the 1990’s, our company was involved in projects in the United Kingdom to automate metal packaging plants for improved cost and service efficiencies. The projects took our team far and wide from London to Wales, and from Windsor to Coventry. Marketing missions also took us throughout the Midlands and to Peterborough.

I remain especially nostalgic about the time we spent working at the plant in Flintshire, Wales a stone’s throw from the meandering river Dee. The plant was located in the highly industrialized corridor which straddles both England and Wales. Today, the area is abuzz with multinationals such as Tata Steel, BASF, Air Products, and Toyota operating out of the Deeside Industrial Park. To the nation’s credit, the United Kingdom has experienced steady and stable manufacturing output and now has the eight largest manufacturing economy in the world well ahead of France and within shouting range of Italy.

Despite the frenetic industrial hum of the Deeside Industrial Park the place somehow managed to retain its bucolic charm. After a long day at the plant one could retire to a charming country inn run by an exceedingly hospitable local host for a quiet, cozy repast, and a restful evening. The world of automation seemed very far away indeed. At daybreak, the sweet yet sad coo cooing of doves was a gentle reminder that another day of work lay ahead.

In recalling Coventry, my principal takeaway was the ghastly sight of the ruins of the fourteenth century Cathedral of St. Michael which was almost totally destroyed by a Luftwaffe blitz in 1940. The adjoining new cathedral obviously belies the classical roots of the original and is too modern and gaudy for me to appreciate. And, yes, Coventry too had a charming country inn. In this case, the inn, run by an American couple from Baltimore, was located in a pastoral scatter of land surrounded by grazing animals.  The husband and wife team proved indefatigable as they would spring up out of nowhere to interact with guests, morning, noon, and night. The couple’s can-do service attitude was emblematic of my adage that “customers are first.”

IT WASN’T ALL ABOUT WORK

Return visits to the United Kingdom included the obligatory tours of Windsor Castle, Westminster Abbey, Kensington Palace, and the Tower of London. All, exuding with the magisterial dignity that can only come from an adherence to a long and steadfast tradition. London hotels, too, are something to behold. Nowhere on earth can you find a line-up of grand hotels like Claridge’s, The Savoy, The Dorchester, The Ritz, The Connaught, and then some. The old-world charm of these bastions of hospitality coupled with very proper British service is an inimitable combination that accrues to the benefit of guests and visitors alike. At the Connaught, I had an experience that restored my faith in proper service. I normally sport a suit and tie. My wife, in obvious exaggeration, says that I even sleep thus clothed. One morning, I walked into the dining room for breakfast, wearing a tie but no suit jacket – I don’t know what got into me but it was highly unusual for me to have left my jacket in the room. No sooner did I step into the dining room the maître d’hôtel stopped me and said, “Mr. Pupo, can I get you a jacket?” It wasn’t long before my ire subsided and I was pleased that decorum had prevailed. I thanked the gentleman for his attention and proceeded to retrieve my jacket from the room.

Travels in the United Kingdom also took us to Blenheim Palace – the birthplace of Winston Churchill – for social gatherings where I had the opportunity to meet the eleventh Duke of Marlborough as well as the former Prime Minister of the United Kingdom, Margaret Thatcher. The duke was jolly whereas the Iron Lady was no-nonsense.

Knowing I stood a good chance of meeting the duke I brought along my copy of Marlborough as Military Commander by the renowned military historian David Chandler with a foreword by the duke. The book recounts the military exploits of the first Duke of Marlborough as the great commander that he was, most notably at the battle of Blenheim in 1704 where he saved Vienna – with plenty of help from Prince Eugene of Savoy – from a combined French-Bavarian force.

I stood in front of the duke with the book in my hand but behind my back so that he wouldn’t see it. After the normal civilities, I asked, “Your Grace, are you the eleventh Duke of Marlborough?” Now, whether he was putting me on or not I don’t know but he gazed up at the ceiling for a moment and said, “By God, I think I am.” “Your Grace, it is such a pleasure to meet you, would you be so kind as to autograph my book?”  At that point, the duke was only too cheerful to oblige.

The duke, it turns out, often rents out the palace for weddings and other events. And, he had plenty of stories to tell in that regard. At one wedding reception, as he tells the story, the duke approached the check-in desk and announced himself. “I’m sorry,” the young lady managing the guest register enjoined, “we don’t have you on the guest list.” “What do you mean you don’t have me on the guest list?” the duke protested, “I own the joint!” After which, he was dutifully whisked through.

At dinner, I had the privilege of sitting next to Margaret Thatcher. We covered a lot of ground but among the many recollections of our conversation her views on the following are most salient: 1) Spanish dictator Francisco Franco – an unsavory individual who nonetheless manned the ramparts against Marxist ideologists thus saving Spain; 2) Bill Clinton – “the first time I looked into his eyes I knew he could not be trusted;” 3) European integration – a mixed bag at best.

As to European integration, lest there be any doubt, from the time Mrs. Thatcher delivered her Bruges, Belgium speech before the College of Europe in 1988, it was clear where she stood on the matter. This, despite recent revisionist interpretations of what might have been in Mrs. Thatcher’s mind; namely, that she would not have opposed the United Kingdom’s exit from the European Union.  Two brief excerpts from her speech should disabuse anyone of that interpretive fantasy:

• “To try to suppress nationhood and concentrate power at the centre of a European conglomerate would be highly damaging and would jeopardise the objectives we seek to achieve.”
• “I want to see us work more closely on the things we can do better   together than alone.  But working more closely together does not require power to be centralised in Brussels or decisions to be taken by an appointed bureaucracy.”

And, for added emphasis, in her book Statecraft: Strategies for a Changing World, published in 2002, Mrs. Thatcher pointedly remarked”that such an unnecessary and irrational project as building a European superstate was ever embarked upon will seem in future years to be perhaps the greatest folly of the modern era.”

Later, at the same function, I met Sir Denis Thatcher a successful business man before he met the future Mrs. Thatcher. He was frankly a ball to be with and was full of one-liners. Sir Denis was not just a consort to the Prime Minister. He provided steadfast devotion and sage advice to Mrs. Thatcher despite the torrent of satirical ridicule which he endured at the hands of an unadoring press throughout his wife’s political career.

THE ROYAL TOUR

The capstone of our experience in the United Kingdom was the opportunity to meet the Prince of Wales. As a member of the Prince of Wales Foundation I was an invited guest to Highgrove in Gloucestershire which serves as the personal residence of the Prince of Wales and Camilla Parker Bowles – titled the Duchess of Cornwall since her marriage to the Prince of Wales. The house is surrounded by magnificent formal and wild gardens which His Royal Highness has had a hand in designing. Thousands of visitors come to see Highgrove House and its gardens and all proceeds from the sale of tours and products are donated to needy causes.

The Prince of Wales heads over a score of charities for the needy and disadvantaged around the world but as you will note from reading my essay Service Management Must Come to the World of Non-Profits, two of the Prince of Wales’ charities have run afoul of sound ethical practices.

After a day’s visit to Highgrove we were next invited to dinner at Buckingham Palace were the Prince of Wales thanked all the benefactors and spoke of the Foundation’s work around the world to help the needy. In a very brief and private moment I had with the Prince of Wales and his American handler for the event I made the observation that the Foundation might want to adopt more modern, digital fund-raising techniques such as on-line, if not mobile, giving as I found the current system very stodgy and out of touch with the world of giving in the twenty-first century. I got a polite nod but I was never asked what exactly I had in mind.

The final stop on our Royal tour came on a visit to the palace of Holyroodhouse in Edinburgh, Scotland. It is Her Majesty the Queen’s official residence in Scotland and has served as the principal residence of Kings and Queens of Scots since the sixteenth century. At sundown a color guard gave a salute to the gathered as bagpipers filled the air with their haunting, wailing tones.

Holyroodhouse is a massive quadrangle structure with a lattice work of apartments and extensive outdoor gardens. It is a must see for anyone visiting Scotland or with an interest in architecture. Mary Queen of Scots occupied the palace from 1561 to 1567 when she was forced to abdicate. The macabre history of the palace – it is legend that it is haunted by ghosts – include the very real murder of the Queen’s personal secretary, the Italian David Rizzio, by the Queen’s husband Lord Darnley and his courtiers. Today, what appear to be the splatter of blood stains are found on the floor of the Queen’s adjoining apartments.

A short ride from Holyroodhouse took us to the Gleneagles Hotel and Resort in Auchterarder. The Gleneagles Hotel is a marvel of the finest hotel service anywhere. The accommodations, the dining, and outdoor activities such as shooting, golf, fishing, and equestrian events are all five stars. The highlight for me came at the restaurant where liveried waiters offered to bring me a whisky distilled on the year of my birth. I thought to myself, “fat chance!” I was sorely mistaken and pleasantly surprised when the waiter produced a bottle of 1946 Macallan without even having to go to the cellar as he had a bottle in his trolley. About an hour away is the golfer’s mecca at St. Andrews. More impressive, however, are the ruins of St. Andrews Cathedral which dates back to at least the ninth century and the nearby twelfth century castle which stands stoically on the rocky shores of the North Sea.

RETROGRADE OR RESURGENT?

The sun has for some time now set on the British Empire but only if that turn of phrase is meant to imply that the nation is no longer the hegemon which, at its apex, early in the twentieth century, controlled nearly 25% of the world’s land mass. Clearly, the nation will never again be the economic or military powerhouse it once was. Yet, the United Kingdom has a thriving economy: the fifth largest economy in the world in terms of GDP slightly ahead of India – a nation with one billion, two hundred fifty million more inhabitants.

The United Kingdom lost its economic supremacy because it failed to adapt. Born of its own past successes, the nation failed to react to new product and service opportunities by continuing to do things the same old way. The United Kingdom’s decline is best explained by a long adherence to a variety of rigid policies and practices that kept it from adapting to new world realities – few of them having to do with the nation’s industrial or manufacturing prowess per se. Yes, labor unions had a big hand in the demise of the country’s supremacy by stiff-arming productivity improvements on the factory floor but other factors did as well. In a nutshell, these factors had to do with a stubborn unwillingness on the part of British suppliers to get sufficiently close to the customer on the continent of Europe and elsewhere so as to better understand their requirements. Finally, British industrialists were late to recognize that the discipline of engineering – the social media phenomenon of the day – was anything more than a trade.

What does the future hold post a departure from the European Union? In my view, the United Kingdom will be the beneficiary of focusing less on Europe, which is stuck at an anemic growth of less than 1%, and more on the rest of the world. One-on-one trade deals with Asian, North and South American countries could reap huge rewards and is an unstated reason why the Europeans loathe the loss of such an important member state. Economies, sooner or later, adjust to external shocks albeit while incurring heavy transaction costs and the commensurate political uproar.

The economy of the United Kingdom is sufficiently robust and the pound sterling sufficiently stable to withstand any post-Brexit shocks. The United Kingdom remains an inspiration for a streak of independence first demonstrated by the signing of the Magna Carta, the passing of the Slavery Abolition Act, and its defense of the British Isles in the face of the overwhelming forces posed by the Luftwaffe in 1940. Its decision to part ways with the European Union ensures that its sovereignty will be preserved while making the country more competitive on the world stage.

To make all of this happen, of course, the nation will have to rely on a fearless leader with the gumption of a Boris Johnson. As the U.K.’s Prime Minister since July 2019, Mr. Johnson will have to smack down the troika arrayed against him: 1) hard left politicians in his own country, 2) globalists in the world-wide media who scorn the idea of Brexit, and 3) imperial bureaucrats in Brussels who will try every trick in the book to make the point that the nation is better served by being subservient to the whims of the European Union.

Editor’s note: “My boss hits me over the head each time he thinks I’m spending too much time on the phone dealing with a customer’s issue.” Ouch! That was the way a caller put it while I was doing a radio interview some time ago.

I was being interviewed to describe my espoused principles and practices on service to the customer, and while I was touched by the man’s distress, I’m afraid to say, I had seen this movie before. Clearly, the caller, a seasoned service worker of many years, couldn’t see eye-to-eye with his boss on a metric for gauging the effectiveness of a response to a customer’s trouble call. Insofar as I could gather, the service worker was motivated to answer all of a customer’s questions before ending a call. The boss might have had the same motivation except that it seemed to have been filtered by some unspecified productivity or financial consideration – how much time was too much time on the phone? What constituted a successful completion of a call?” –  which had not been communicated to or embraced by the service worker.

In behavioral economics, this is a classic principal-agent problem. Principal-agent problems exist in business, politics, and in life generally anytime one party is empowered to act in another party’s behalf. In our context, the boss – the principal – and the service worker – the agent – had failed to align their goals and expectations of service performance to the customer. The crux of the principal-agent problem is a failure of the principal to explicitly stipulate incentives – tangible as well as intangible – that channel the agent’s efforts and with which the agent is in full accord. Left unresolved, misaligned goals lead to conflicts of interest where each party behaves in its own self-interest. The upshot of this behavior, if not stemmed, can become internally dysfunctional to the organization, and easily telegraphed to the marketplace. Customers are very adept at discerning ambiguous service commitments and when they do, they do the only logical thing in their power: they vote with their feet.

BALANCING PRINCIPAL-AGENT GOALS

My suggestion to the caller was to sit down with his boss and see if they couldn’t agree on a standard of performance. In effect, I was suggesting that principal and agent codify or “contract” the measure(s) of service to the customer that they both could agree on. Concrete measures of performance are indispensable: they allow the principal to monitor the effectiveness of the agent’s work and, just as importantly, it allows the agent to police his own efforts. This is crucial if the goals and expectations of the players involved are to be harmonized. These contract measures can be made all the more effective if the agent’s compensation is linked to his agreed-upon performance.

Equally crucial, the boss needs to see that the benefit of having a satisfied customer at the end of a call far outweighs the cost of the agent’s labors – the so-called agency costs. Browbeating or otherwise punishing the agent has the potential to increase the principal’s agency cost if he is left with no alternative but to remove the “offending” worker.  Conversely, the benefit of terminating a call before a customer has had all of his questions answered pales in comparison to the potential damage that a dissatisfied customer can have on the business. In effect, a service interaction is complete only when the customer says it is and not before. And, certainly not after some arbitrary number of ticks on the clock have expired.

Fundamentally, principals must recognize the wisdom of devolving power to the front-line service worker: the agent most entrusted with delivering service to the customer. Further, the principal needs to be egoless about this reality and about the fact that the service worker knows far more about his subject matter – customer service issues – than he does. A less than confident and trustful principal will fail in his relationship with the agent no matter how extensive the “contractual” obligations agreed to by the parties. Similarly, a less than fully competent service worker will likely fail in his ability to hold up his end of the bargain and find himself subject to remedial actions by the principal.

CUSTOMER SATISFACTION IS A MOVING TARGET

Complicating the principal-agent problem in servicing the customer is that customer expectations are fluid. They constitute an ever-changing standard of performance rendering customer satisfaction totally ephemeral. For that reason alone, it is imperative to constantly and continuously reach out to the customer and gauge his evaluation of the level of service he is receiving. It goes without saying, for example, that a customer can have all of his questions answered by the service worker on the phone and still walk away a dissatisfied customer.  

Principal-agent problems cannot be left unresolved. They can only fester and do nothing but damage even the most apparently solid customer relationships. Striking a principal-agent agreement mutually acceptable to both service worker and boss is essential to delivering the best service the organization can possibly muster. But, recognizing that excellence in service pivots on harmonizing principal-agent dynamics is a most important first step in achieving that goal.

THE “SHARING” ECONOMY MUDDIES THE PRINCIPAL-AGENT WATERS

The so-called sharing economy in which online platforms network those who drive cars (Uber), rent apartments (Airbnb), clean laundry (Washio), deliver groceries (Instacart), sell goods (eBay), or render handyman services (TaskRabbit) with consumers seeking those services sheds a different light on what we understand of principal-agent dynamics because of the muddled mess that a network of multiple stakeholders presents. Distinguishing principals from agents in these companies is a challenge as there is no common employer and no shared mission.

Some preliminaries, however, are in order to better come to terms with this issue. The “sharing” economy is not about sharing at all. It is, more correctly, about selling or renting assets or about selling labor. The “gig” economy, which we discuss in a separate essay, Service to the Customer in the Gig Economy is a more fitting term for on-line platforms which sell the services of laborers – blue or white collar. Companies such as Uber or Instacart clearly fit that category. On-line platforms that either sell or rent assets are capital-based or asset-based platforms and are therefore unlike their gig brethren. Airbnb and eBay are notable examples of capital-based platforms.

Most companies understand the benefit of enforcing operating and service consistency in order to build and protect their brands. The business models of on-line platform companies, however, are predicated on the ability to empower their service workers – drivers, landlords, or carpenters – to operate almost totally independently of the brand they are supposed to represent. Consider that Airbnb has four million listings hosted by nearly 700,000 landlords around the world. What are the chances that the networking giant and its landlords are on the same page when it comes to serving the customer?  Uber, for its part, has over two million drivers.

Consumers seeking low cost and digital convenience from on-line platforms need to understand that seeking redress for service, liability or other issues is an area of compromise that is part of the bargain of doing business with these companies. If an Airbnb tenant finds – as has been reported in the press – an apartment bedroom with a concealed webcam, an apartment almost totally devoid of furniture, with dirty linen, holes in ceilings, holes in floors, inoperable appliances, and swarms of insects where does he turn? That’s not the worst of it. Murder and rape have also been reported at Airbnb facilities. In New York, a career criminal was found to have been in possession of duplicate apartment keys which allowed him to rape the unwary tenant. If a Uber customer finds that the driver is inebriated, does not know his way around town, maneuvers unsafely or drives a junker, where does he turn? Or what if a Uber Eats driver has “outsourced” his route to someone with a criminal record, never mind a person without working papers?

A proactive leadership group would seek to grapple with these principal-agent issues by providing enhanced vetting, monitoring and grading of service workers, and by offering more frequent education and training programs. These initiatives would clearly lead to an uptick in operating cost and with millions of service workers in these networks the cost impact would be significant and threaten the very business model on-line platforms are trying to perpetuate. Service to the customer, however, might just be the beneficiary

According to the Bureau of Labor Statistics (BLS) there were roughly 16.5 million workers in the United States in 2017 who either had contingent work arrangements – work engagements that were strictly temporary – or those who had alternative work arrangements. Independent contractors, workers on call, and those on temporary help-agency rosters fit the latter category according to the government.

A 2016 survey by the McKinsey Global Institute, however, reports that something on the order of 54 to 68 million workers in the United States are independent workers. The delta in the two sets of numbers is due in large part to McKinsey’s methodology which counts the self-employed, the part-time worker, and those holding multiple jobs.

Much has been made of the growth of the so-called gig economy and McKinsey’s numbers seem to underscore if not portend a new phenomenon in the labor force.

WHAT EXACTLY IS NEW?

Since time immemorial workers have relied on holding down multiple and simultaneous job engagements in order to put bread on the table. It was only with the advent of the Industrial Revolution that a fixed job with a fixed employer became the norm.

In more modern times, industry sectors as diverse as transportation, energy exploration, and manufacturing have been heavily reliant on the services of independent contractors. These workers, by virtue of their specialized skills, contract with an employer for the duration of one or more projects at the conclusion of which they are ready to move on to a different project either with the same employer or with someone else.

I have engaged hundreds of independent contractors placed in our employ by third-party agencies. Clearly, hiring contractors through an agency is more expensive – agency markups can run as high as 50% of the worker’s hourly rate depending on the scarcity of the required skills set – than hiring someone off the street but the agency bears the onus of finding, vetting (conducting skills testing, drug screening, criminal, and credit checks), and recruiting the worker in question. And, if the worker does not pan out the agency replaces the worker with new talent at no additional cost. At the end of the year, the agency-placed worker receives a W-2 for wages earned and taxes withheld. If an independent contractor is offered permanent employment the agency is entitled to an additional placement fee.

Temporary work is now held to be a “gig.” The term, having moved from smoky jazz halls, now refers to a worker’s engagement in any field of endeavor for some period of time or for some specified project. In the broadest terms, a freelance gig worker is no different than an independent contractor as described above. Beneath the covers, however, the differences between the two are stark and customers should be wary and take note.

Gig workers, by and large, are not agency-placed as they market themselves out through on-line platforms (corporate branded or not), by word-of-mouth or in some other way. And, unlike their independent contractor brethren they juggle multiple short-term projects for multiple employers at the same time. Gig freelancers may or may not receive a 1099 from their employers – a homeowner, for example, who hires a handyman will likely not report the worker’s earnings even if they meet the IRS minimum of $600 – for wages earned but, in any event, they become responsible for reporting their earnings and therefore their taxes.

IS THERE A PLACE FOR SERVICE IN THE GIG ECONOMY?

The service consequences of hiring gig workers should be obvious as the crush of employers to hire labor as cost-efficiently as possible throws customer service caution to the wind. According to the accounting firm of Ernst and Young the number one driver by far, at 66%, for large enterprise companies – $5 billion and above in revenues – to hire temporary workers is to control cost.

News flash: cost efficiencies and not service effectiveness have always ruled the roost in corporate America. In a McKinsey study in 2017, 87% of executives and directors surveyed reported pressure to demonstrate strong financial performance in two years or less. Worse, 55% of executives and directors said their companies would delay a new project to hit quarterly targets even if it sacrificed some value. This is nothing new. Peter Drucker decades ago suggested that, “…the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top managements toward decisions they know to be costly…”

Customers accustomed to slipshod service from established providers should ready themselves for this latest onslaught of poor service courtesy of the gig economy. It stands to reason. As I argue in another essay, The Principal-Agent Problem in Service to the Customer, freelancers have no common cause or mission with those who employ them whether they be general contractors or ultimate consumers. Some freelancers go so far as to “outsource” their work, as it is now not uncommon to find in food delivery, to others who receive zero vetting and who may not even have working papers at all. The relationship, clearly, is strictly transactional as there is nothing substantive bonding the parties.

The principal advantage to being a gig worker is the freedom that comes from not having to report to a nagging boss or to live by a set of strict corporate norms and the politics that go with it. In other words, the gig worker and not his employer is in control: in control of work schedules, job performance, and customer interactions. My further take is that the main benefit the gig worker enjoys is having the ability to flit from one job to another picking off low-fruit, high-margin jobs and never having to risk being called on the carpet for non-performance.

This fragmented governance model will make a shambles of protecting the integrity of any enterprise brand but it doesn’t have to be that way. Independent contractors I hire, once vetted, receive orientation sessions that stress our “customers are first” culture. I also require that contractors abide a set of confidentiality and security of information provisions. Also, contractors are required to receive a modicum of education and training, and are on-boarded and off-boarded just like permanent employees. Performance reviews are also part of managing the contractor workforce. Furthermore, except in extreme cases of negligence on the part of the contractor, the company is answerable to any claims of liability.

The gig economy, as it is currently framed, is at cross purposes with what we as customers seek from those who work for us. Enterprises might be giddy at the prospect of hiring just-in-time workers to mitigate costs but unless they fix the broken governance model as alluded to above all of the cost savings in the world will be for naught. A brand’s reputational damage can scarcely be compensated for by shaving pennies off a worker’s hourly wage. Customers seek competitive prices, that is true, but they also seek intangibles such as competence, loyalty, honesty, and integrity. And, until the gig economy serves up these qualities customers are well advised to seek more conventional sources of labor as imperfect as they might happen to be.