Honest Business

Inc. Survey: Four vignettes posing hypothetical situations involving business ethics.
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The four stories on the following pages capture some of the dilemmas of starting a business, involving tough questions of right and wrong. What would you do?

The discussion here at Inc. that morning got a little heated -- which is why we're inviting you to test your ethical judgments against those of other businesspeople all around the country.

The connection? Let me explain. Several months ago, eight of this magazine's editors gathered around the big oak conference table for a critical assessment of the previous month's issue. When the discussion turned to an article called "Supply-Side Financing" (February 1989, [Article link]) -- well, that's when a few voices were raised.

"It's just wrong," said one editor. "Bad business and lousy ethics. How can we appear to be condoning it?"

"It" was the story of Dennis Chang, president and chief executive of Jasmine Technologies Inc., in San Francisco. Strapped for cash in his company's early days, Chang had paid his suppliers as little as he possibly could. But what really galled the protesting editor was Chang's pledge of personal guarantees well beyond his net worth. "The first guarantee devalues all subsequent guarantees," wrote author Ellyn E. Spragins, "but your suppliers don't know that."

The debate raged, the idealists among the editors charging Chang with unethical behavior, and the realists accusing the idealists of terminal naïveté. ("If nobody stretched their creditors, nobody would ever get a business started.") By May a chorus of letter writers had joined in. "What happened to the days when an individual's word meant something?" asked one. "You've provided an outline for larceny," charged another. Author Spragins was unapologetic: "Supplier finance is no more inherently unethical than any other business practice," she retorted. Chang himself argued in a later letter that he had built personal relationships with his vendors, getting credit "openly and honestly." Of course, there were risks -- "but isn't that the nature of being in business?"

Somehow I doubt we'll ever resolve this dispute to everyone's satisfaction. But it got us thinking: despite all the hoopla over business ethics, no one has paid much attention to the choices entrepreneurs must make every day. If you leave one company to start another, is it OK to take a co-worker with you? What about luring away a customer? When you're borrowing money, how much do you have to tell your lender? And -- remembering Dennis Chang -- what are your obligations to your suppliers?

As they say on late-night TV, wait! Don't answer yet.

Instead, take this little test. Read the vignettes on the following pages about a fictitious company you are starting. Figure out what you'd do in the situation outlined, and check the appropriate box.

Then turn the page. Not for the "right" answers, because we don't think there are any. Instead, you'll see who agrees with you.

A few months ago we sent this same questionnaire to a sampling of Inc. readers. Several hundred responded, not only with checkmarks but with strong opinions and stories of similar situations they had lived through. Compare your own responses with theirs -- and if you don't think theirs are on the money, let us know.

Ready? Here's the background:

THE STORY

You've been involved with computers all your working life. Five years ago Rob Firman asked you to join his new data-processing company; today you're a sales manager in Firman's 20-person shop. But you really want to start your own data-processing business, and for the past few months you've spent your evenings doing spreadsheets, developing customer lists, and otherwise mapping out the new venture. Firman knows nothing about your plans. You'll tell him as soon as you're ready to give notice.

In the meantime, you continue to put in a hard day's work. But now and then a difficult situation comes up. . . .

THE KEY EMPLOYEE

It's 5:30, and there's a knock on your office door. Quickly you rehearse your pitch one last time, even as you're calling for Lowrey to come in. The programmer enters and sits down, grinning.

"Did you hear?" he asks. "Seems the boss wants me to put on a tie and begin acting like an executive."

You congratulate him, but the doubt once more flickers across your mind. The start-up you're planning needs Lowrey. He's the quickest technical guy you've ever met. He has an incredible knack for making clients feel at ease. And more than once he's told you he'd like to be involved in a new venture someday.

If it weren't for Firman, you'd offer him a job right now.

Face it, you think, Firman put you where you are today. He not only hired you and trained you, he gave you more responsibility than you were ready for, confident that you'd grow into it. And you have -- so quickly that now you're chafing under his sometimes-arrogant authority. When you leave, Firman may feel betrayed. But you steel yourself against the remorse. That's business. Firman is a big boy.

But what about Lowrey? Just last week Firman told you his hopes for the young man. He talked of broadening Lowrey's responsibilities, of eventually bringing him into management. Just the guy I need, he said, to help me take this company past $2 million.

You look again at Lowrey, sitting in your office, smiling to himself. You know he's essential to Firman's plans. But you also know where his long-term hopes lie, and that he'll take a job with your start-up if you offer one. You even think that Firman, if he weren't personally involved, would encourage you. "A man has to look out for himself," he likes to say.

What Do You Do?

* Offer Lowrey a job.

He's the one who'll be making the choice, after all. Firman can take care of himself.

* Quit thinking about the start-up

until you leave your job. You shouldn't be doing it on Firman's payroll.

* Bite your tongue.

It's OK to keep planning the start-up, but don't mention it to Lowrey until you've left.

THE CUSTOMER

Lisa Meggett sips her coffee, leaving her words hanging. You bite off some bread, trying to chew slowly and think fast.

Meggett is managing partner of a consulting firm, one of Firman's customers, and you've been handling the account. Today you've asked her to lunch, ostensibly to discuss her longer-term data-processing needs. In fact, you want a chance to talk up your new company. You figure you can offer her the same services she's getting from Firman, only for 30% less. And now she has left an opening you could drive a minicomputer through.

"I'm afraid I have bad news," she had said. "I hope you won't take it personally, because I've always enjoyed working with you. But computers are so cheap now, we're planning on bringing our data processing in-house. We should save 20% over what we're paying you. Unless you can match that I'll have to close our account."

Give me a break, you think -- not only can I beat it, I can show her exactly where her figures are wrong. She hasn't counted the cost of hiring, training, and keeping busy the new people she'll have to bring in. She hasn't counted overhead. The sales pitch is a no-brainer, and Meggett's firm could be a big customer for your planned new company. But that's not what's troubling you.

You were just leaving for lunch today when Firman came in. He was edgy. "Listen," he told you, "don't take any bull from these people. I play golf with one of the partners over there, and he's been going on about buying this new computer. I bet you hear all about their big in-house plans and how much money they'll save.

"My attitude is, let 'em go. They'll find out it's not so easy, and they'll come crawling back to us. This isn't tiddledywinks we're playing here. If that's their plan, say so long and wish them well."

Now, back at the restaurant, Meggett looks up, awaiting your response. You can take Firman's approach, even though (you can't help thinking) it amounts to shafting the customer. Or you can make your own pitch, offering Meggett the best deal she'll get and maybe landing your first account.

What Do You Do?

* Do as Firman says.

You're on his payroll, after all.

* Make your pitch.

Serving the customer better is what business is all about.

* Have an open-ended discussion.

Make your pitch after you've left your job.

And Now . . .

You've made the big move, leaving Firman and starting up a brand-new business. But you find that the dilemmas are still with you. . . .

THE BANKER

Driving back to the office -- your office, you think proudly, with your five-month-old company finally moved in -- you review the events of the past few hours.

What a meeting! The sales pitch you had so carefully prepared was scarcely necessary -- it was as if the customer had long since decided to sign the contract. The amazing part was, he also wanted you to take on all his affiliated offices. Now, as you drive, the wheels are spinning in your mind. You'll need several new programmers and a couple of support people. You'll need new machines and more space.

The tricky part, you realize, will be handling Norton at the bank.

So far, Norton has been everything an entrepreneur could ask for in a banker. Conservative, sure -- he's a banker, isn't he? -- but nevertheless helpful. He arranged a modest line of credit secured by some of your hardware, and you are already into him for $25,000 or so. What's keeping him happy, of course, is your hefty cash balance and your prompt payment record. This move will change all that. You'll have to drain your cash, hurrying up your receivables and stretching your payables from now until summer if possible. You'll have to utilize Norton's line to the fullest.

Braking at a light, you realize your excitement is tinged with frustration. If you're straight with Norton -- if you tell him everything you're planning -- he'll tell you you can't handle that much growth, that you're crazy to be taking on so much new work so soon. He'll tell you that your debt will be too high and your cash too low. He might even say he's going to have to cut back your credit line -- exactly what you can't afford.

On the other hand, you think: it's not his company. His loan is secured by the equipment. And there's no reason you have to tell him everything you're doing; you won't even be audited for another seven months, and by then you should be making money. You are, after all, in business to grow -- and you've got one big opportunity to do just that.

What Do You Do?

* Come clean to Norton.

Try to convince him you can handle the growth. If you can't, don't accept the new job.

* Keep quiet.

Tell Norton as little as possible. Take the new job, manage the cash carefully.

* Compromise.

Tell Norton little but admit to yourself he has a point. Take the new job but look hard for more investment capital.

THE SUPPLIER

That's him now, you think, as you look out your office window and see Dick Wilson getting out of his car. You know Wilson a little; you've even played golf with him a couple of times. So it was natural to call him. In any event, he represents the best office-furnishings company in town, and you suddenly have several new offices to outfit. He enters your office, sticking out a meaty hand.

"Thanks for coming out, Dick," you say. "Here -- let's take a little stroll and you can see the space we're talking about."

Walking through the vacant rooms, you know you've got him where you want him. You did business with Wilson's company at the beginning, paying them promptly with your start-up capital. When they run their credit check they'll learn you have plenty of cash left and a good payment record. No reason for them not to cooperate on this one -- ship the furniture and equipment out, bill you 30 days, not even pick up the phone until 45 or 60 days.

Granted, they don't know what you're planning. They don't know that the rooms Wilson's measuring will soon be occupied by several expensive programmers and several expensive machines. Or that the cash drain on your company will be severe. In the end, you calculate, it'll be roughly six months before Wilson's company gets all its money. You'll send them just enough to show your good faith -- and to keep the moving trucks away from the door.

Now, talking with Wilson back in your office, you consider telling him the whole situation. Would it scotch the deal? Maybe, and then you'd be left with a bunch of unfurnished offices and the word out that you were short of cash. On the other hand, who's hurt if you say nothing? Wilson's company will get its money eventually, and you'll be ready for the new business you're taking on. Even in the worst situation, all they need to do is come get their furniture.

What Do You Do?

* Tell Wilson

all your plans. If he backs out, find another supplier.

* Keep mum.

Credit is his company's problem, not yours.

* Postpone.

Don't contract for more furnishings until you can afford them, even if that means postponing the planned expansion.


WHAT THE RESPONDENTS SAID

THE KEY EMPLOYEE

12% Offer Lowrey a job

6% Quit thinking about the start-up

82% Bite your tongue

In Their Own Words . . .

* "Make the offer! Employers must compete for employees as well as for customers."

* "Making a low-key offer to Lowrey isn't 'stealing' him. But let Firman know your plans."

* "I offered the job while I was still employed. It was a mistake. The person didn't go in with me, and it could have ended up in a costly lawsuit."

* "Not offering the job is unfair to Lowrey. But be honest with Firman. He was once involved in a start-up -- remind him of that."

* "Until your plans are definite you're risking your career -- and Lowrey's. It's not a done deal until you're out."

* "I encounter this as 'Firman.' I encourage workers with entrepreneurial leanings to discuss things with me. Maybe we can help them get started so both of us benefit."

* "Quit thinking about it! Give your best to one thing at a time."

* "I've been on Firman's side of the issue and didn't like what my colleague did."

* "Congratulate Lowrey, but hint that someday you want to have your own company. Don't say when."

In Real Life

On the spot: Andy Friesch, founder, Heartland Adhesives & Coatings Inc., Germantown, Wis.

Friesch was a top sales producer for a $100-million-plus company in the industrial adhesives industry. But he felt that his opportunities were limited there, the company was "underutilizing what I was best at," and anyway he had dreams of going out on his own. Two of his co-workers, one in marketing and one in the technical end, seemed like prime candidates to help him get started.

What he decided: In Friesch's mind, there was no question. "I asked them to join me. Some people think I'm a rebel on this, but so long as you don't violate a noncompete agreement you have to look out for yourself first. I said, look, I'm not twisting your arm; if you want to stay here I respect that. But I have a vision and I want to follow it.

"I don't want to give the impression I'm not a loyal person. But when it comes to corporate America, individuals have to do what's in their own best interest. Corporations look out for themselves first and employees second."

The upshot: No one came. "They were willing to talk about going off with me, but when it came right down to it they didn't want to make the sacrifice." Were there hard feelings when he left? "Not from my peers. My superiors -- I don't think they like what I've done, or what it says about their company."

THE CUSTOMER

12% Do as Firman says

22% Make your own pitch

66% Have an open-ended discussion

In Their Own Words . . .

* "Do as Firman says. But set up an unofficial meeting and make your pitch."

* "Tell Meggett here's what Firman says -- but then tell her you're starting up and can save her both headaches and money."

* "Make your pitch. Firman has lost the concept of customer service."

* "If Firman won't serve the customer, I certainly will."

* "When I realized my boss really didn't care, I went back to the customer and made my pitch without the boss's knowledge. At that point it was none of his business."

* "Don't try it. One of our salesmen left and took some of our accounts. We sued him and won."

* "If you're still taking Firman's money you have to do your best for him."

* "While on the payroll you must represent the firm or tell the boss why not."

* "Regardless of Firman's directions, he'll really be upset if you lose the account."

* "In a similar situation, I quit almost immediately and landed the account."

In Real Life

On the spot: John G. McCurdy, founder of Sunny States Seafood, Oxford, Miss.

Working for another Mississippi seafood distributor, McCurdy was furious with his boss. On paper they were partners, though McCurdy's 8% interest paled beside the other man's 92%. But it seemed to McCurdy that he was doing all the work while the other fellow took home the money -- and ordered him around besides. So McCurdy decided to go out on his own. Hearing of his decision, several customers asked to go with him; some even called him up after he had established his own company, asking to do business.

What he decided: "I wanted to do anything I could to close that company and put him on welfare. But taking accounts just wasn't the right thing to do. I'm only 24 years old, I've got another 40 years left in business, and if I do somebody like that, somebody's going to do me like that. I don't live by the Golden Rule all the time, but that time I did."

The upshot: McCurdy is succeeding, and has recently opened up a franchised store in Tupelo. His former employer: pfffft. "He got into debt and had to sell out to a big catfish company."

THE BANKER

44% Come clean to Norton

30% Keep quiet, tell Norton little

26% Compromise, say little but look for investment

In Their Own Words . . .

* "Banks don't like surprises. Norton's an entrepreneur's dream -- don't blow it!"

* "Convince Norton you can handle it. If he disagrees, take it to another bank for evaluation."

* "I'd keep quiet. Growth is my business, banking my banker's."

* "Bankers haven't the foggiest idea how to run a company. Tell them only what they require."

* "Without my bank I'm out of business. So I don't do anything to test the relationship."

* "I'd ask Norton to come to lunch and show him this wonderful opportunity, but tell him when I run the numbers they look thin. Get him excited, give him the facts, ask for his assistance."

* "Could you get the job and phase in the affiliates on a dated schedule?"

* "Work with the new client to get some up-front money."

* "I spent 10 years as a banker on Wall Street. No surprises to your banker!"

* "Bankers are never very knowledgeable or competent."

In Real Life

On the spot: W. Mark Baty Jr., Accredited Business Services, Cleveland

Some years ago, Baty was running his own metals recycling business and was approached by a big customer. To land the account he needed a load lugger -- a specialized truck with a hydraulic lift on the back -- costing some $60,000. Approaching the bank for a loan, he knew his overall financial situation was a little shaky: he was in debt to his parents and in-laws, stretched out on his credit cards, and finagling his receivables and payables. "I'd try to collect my receivables in 10 days if I could, and I'd put off my payables for 30 or 60 days, whatever the traffic would bear." But he also knew he could get the account if he had the equipment.

What he decided: "You don't lie to a bank -- but I certainly don't believe in offering them more information than they ask for. You don't tell them the loans your parents made to you, the money you've used from credit cards for your business. Playing with your accounts receivable and payable, you definitely don't tell your banker that. You're doing a little bit of creative financing, you're using everything you can to keep your business going."

The upshot: He got the loan, paid it off, and the banker was never the wiser. "You're not lying to anybody, and you're not falsifying records. It's something that's done every day in business."

THE SUPPLIER

65% Tell Wilson

11% Keep mum

24% Postpone

In Their Own Words . . .

* "Tell him. Then set a payment schedule agreeable to all."

* "Tell him. You can always find eager vendors willing to grant terms. It isn't worth your ill health fending off collectors and repo men."

* "Keep quiet. Once you start to do something, it's ridiculous to vacillate."

* "We kept quiet. We kept one strong credit reference and finessed a number of purchases off that reference."

* "I got several bids in a similar situation, making it clear that a delayed payment schedule was an important decision-making criterion."

* "Postpone. Too many start-ups overextend their expenses."

* "Buy used furniture. If you have to have all the best trappings at this point, you probably should have stayed where you were."

* "I stretched out payments once, and I regret it. Be up-front and negotiate terms, then stay within them."

* "I bought door panels and bridged boxes to make temporary desks."

* "We got the equipment and later went into Chapter 7. Because I guaranteed the payment, the equipment company got everything they were owed."

In Real Life

On the spot: Kurt Listug, cofounder of Taylor Guitars, Santee, Calif.

Listug was only 21 when he and his partner founded their guitar manufacturing company; the partner was all of 19. "We had no idea what we were getting ourselves into." But they plowed ahead, ordering supplies and materials even though they weren't quite sure how they would pay the vendors. Among the orders: $1,200 worth of rosewood, purchased from C.F. Martin & Co., a venerable and considerably larger guitar manufacturer.

The $1,200 didn't get paid. And didn't get paid. "I remember being so broke," recalls Listug. "We only owed them $1,200 -- how could we not have it? But we didn't, for a long time." Martin finally gave up, sending the bill to a collection agency. But Listug's company still couldn't pay it, and the creditor too threw in the towel.

What he decided: "Years later, after they had written it off, we started to catch up. We made a list of our bills and added that one to it. Finally we had the money and we paid them -- out of the blue. They were shocked by the whole thing."

The upshot: Listug's company now has 35 employees -- and a deal with a supplier who gets his wood in India. "We're not buying from Martin now. But we've bought rosewood pretty regularly from them over the years."


HOW THE SURVEY WAS CONDUCTED

A few months ago we sent the Inc. Business Ethics survey to a random sample of 5,000 subscribers across the country. A total of 388 readers replied, for a response rate of 7.8%. The first 337 responses were tabulated by computer to give the answer percentages reported above. Except for minor editing, the situations described in this article are as they appeared in the survey.

Many thanks to those who took the time to fill out the questionnaire. One professor of business communications even asked her students to take the survey; though the results arrived too late to be included in this report, we'll try to report them in a future issue.

Last updated: Jan 1, 1990




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