The sale of White Dog Café had more strings attached than the Philadelphia Orchestra. Judy Wicks, the co-founder of Urban Outfitters, launched the restaurant in 1983 on the edge of the University of Pennsylvania campus as an early bastion of the sustainable food movement. Before selling White Dog in 2009 she required the new owners to sign a "social contract" that preserved much of what she'd put in place, such as buying only from local farmers; maintaining the ratio between the highest and lowest paid employees; relying on 100 percent renewable energy; and--to prevent the company from metastasizing into a chain--requiring that 51 percent of the ownership of any new White Dogs live within 50 miles of the business.

Wicks purposely kept her company small--revenues never exceeded around $5 million--to protect her values. In April, two miles from White Dog, another entrepreneurial business appeared to betray its own. Protestors, police, and news crews swarmed a normally peaceful corner of Philadelphia's affluent Rittenhouse Square neighborhood after a manager called the police to arrest two black men who asked to use the bathroom without having ordered, and then refused to leave.

As crowds descended chanting "Starbucks coffee is anti-black" the company launched a full-throated mea culpa, announcing it would close 8,000 stores for a day of racial bias training. (On Wednesday, Starbucks announced it had settled with the men, Rashon Nelson and Donte Robinson, for an undisclosed amount and a free college education. The city of Philadelphia reached a separate agreement, a symbolic $1 each; the city will also contribute $200,000 to a grant program for aspiring high school entrepreneurs.)

Starbucks' founder and executive chairman Howard Schultz was among the most visible faces of the company's contrition. Schultz, who grew up in a housing project in the Canarsie section of Brooklyn, NY, is an icon of social entrepreneurship. Starbucks was one of the first employers to provide health insurance to full- and part-timers. The company offers employees free college tuition and aggressively recruits from overlooked communities, including veterans, refugees, and ex-offenders. It was Schultz who drove the 2015 campaign to engage employees and customers in conversations about race. That effort--#racetogether--was an epic debacle. But Schultz at least was trying to do the right thing.

For many socially minded founders, the image of Schultz unburdening during a CBS interview ("I was sick to my stomach. I was embarrassed. I was ashamed,") must have been a there-but-for-the-grace-of-God moment. Schultz talked about the dangers of "unconscious bias," which quickly became the catchphrase for this particular crisis. What he did not mention was another contributing factor: scale.

Wall Street analysts have hammered Starbucks for overexpansion because that strategy can dent unit sales growth. But size also affects the company's ability to enforce its values. Small companies famously reach a point--conventional wisdom says it's around 150 people--at which founders look around with dismay, realizing they no longer know everyone by name. More importantly, they no longer know everyone: how this employee regards women or how far that one will go to close a sale.

Yet every day leaders give their cherished missions and their reputations into the hands of these strangers. The vast majority will likely do them proud. Some small percentage will not. And when, like Starbucks, you employ upwards of 250,000 people, that small percentage presents a real vulnerability.

The problem is compounded by the now commonplace practice of pushing decision-making down the ranks. It's an admirable trend that bestows dignity and raises morale while exploiting workers' smarts and creativity. To convince employees of their own autonomy, leadership touts taking risks and the freedom to fail. But no one can afford to take risks with ethics. No one can afford to fail on mission.

That's what happened in the Rittenhouse Square Starbucks. And no amount of corporate indoctrination can protect a business against that single bad decision made unconsciously--or in some cases, consciously--by one employee among hundreds of thousands. Ethics isn't rules. It isn't best practices. Ethics is personal moral principles. That's a tough thing to "cascade" through the business, as scaling experts advise.

Which isn't to say entrepreneurs shouldn't do everything in their power to grow. If you care deeply about human beings and the environment, arguably the bigger you are the more good you can do. But also the bigger you are the more your values become vulnerable to dilution, distortion, or disregard resulting from ill intent or carelessness, particularly at the business's extremities.

The threat is greatest when fast-growing companies absorb large numbers of people in mighty gulps; and the tight labor market makes things worse by reducing choices. Leaders talk about prioritizing attitude over aptitude, which can work. But the non-negotiable has to be character, which is something you can't train for.

Of course even those companies that resist gigantism can't protect against every threat to ideals or reputation. But midsized businesses like Patagonia and Eileen Fisher have soldiered on for decades with nary a deviation from their missions. It will be fascinating to watch how Mod Pizza--a social champion on a growth tear--will handle the challenge.

The tension between scale and ethics should concern every entrepreneur who gives a damn about something beyond profits. If the mission comes first, how much control can you afford to lose? As you promote risk-taking and autonomy, have you made explicit the boundaries no one may cross? Are you so concerned about shoveling onboard bodies that you disregard the minds that come with them?

A reputation is a terrible thing to waste.

Published on: May 3, 2018