Earlier in the year we published two important posts about ethics. It is worth building on them today because Firmsconsulting is built around the principle of strong values. And we should be discussing this concept more frequently as it is widely misunderstood.

In the first post, entitled Ethical Standards are No Small Matter for McKinsey, we looked at how to make ethical decisions, we also discussed the trade-offs and addressed 3 myths about ethics.

In the second post, entitled Ethics is Shaped by Your Social Network, we pointed out that ethics is about judgment and we addressed what is one aspect of your life that has a considerable impact on your judgement and determines how ethical or unethical you choose to be, or even could be. We also discussed what you should consider doing to influence that impact.

Ethics as a sustainable competitive advantage

We discuss ethics today not because it is a nice thing to do, but because being ethical gives you a sustainable competitive advantage. Values and ethics are not feel good concepts that should be taught at the end of an MBA program, as it is currently often done. Values is a material competitive advantage that is difficult to replicate and has a tangible financial impact. It is worth understanding and building your life around this. It is one of the most formidable tools you can have to build your career and life. So before the year comes to an end let’s revisit the subject of ethics.

When you begin your adult life, your ethical position is determined mostly by what you tell people. As you mature, your ethical position is increasingly determined by your actions and track record.

When you are young you flash around career enhancing jewelry. Little baubles that indicate your worthiness. You want to have Harvard on your resume, McKinsey on your resume and a GMAT 780 score on your resume.

You don’t yet have a track record of being outstanding in a specific line of work so people use these metrics/baubles to determine if you have a good standing in the world.

They look at this career enhancing jewellery to judge your worth.

As your career progresses, you begin to be judged more by your actions and less by the jewelry. If you lack character and integrity you always need more additional hard skills and career enhancing jewelry to compensate for your lack of ethics/weak reputation. It forces you into this skills arms race because you do not have a reputation which encourages people to work with you.

You need some other incentive to encourage people to work with you.

How McKinsey and BCG use ethics as a sustainable competitive advantage

If you are someone whom people trust implicitly, they will hire you just because having you there signals enormous credibility and because they know you will do the right thing. That is one of the reasons BCG and McKinsey are hired to do corporate strategy.

It is not just because they can do something many other consulting firms cannot do. It is because when you offer your chairman of the board a McKinsey or a BCG report, there is an implied credibility there whereby it is known that BCG and McKinsey have a reputation for walking out of the engagement if it is wrong for the client.

The fact that they completed the engagement is a credibility stamp on the report.

In other words, both firms have developed a track record of taking short-term pain (walking out of engagements or not undertaking engagements and losing revenue from such engagements) to do what each firm thinks is right.

It takes years to build true credibility.

Other firms that do not have such credibility look for baubles. They look for technical skills to impress the client. They may claim to have a new methodology, lower prices etc. So you see how this plays out.

Also note that two consulting firms growing very fast may be enjoying high growth for very different reasons. One could be growing fast because it is benefiting from its credibility in the market, which was built years ago. Another could be growing fast since it is discounting fees and paying too much for talent.

In other words, not all growth is equal. The drivers of that growth matter enormously.

An example of ethics as a sustainable competitive advantage outside of consulting

Of course, ethics is a major sustainable competitive advantage outside of consulting as well.

In 1956 Warren Buffett returned to Omaha, after a stint at Graham-Newman in New York City, where he worked for his teacher and idol Ben Graham. Warren had about $174,000 and he was going to “retire.”

In pursuit of his goal of becoming a millionaire he decided to start a partnership like Graham-Newman’s sister hedge fund, Newman & Graham. This would allow him to raise money to manage and invest it from his house, putting money into the same stocks as he bought for himself. The plan was to invite friends and family into the partnership.

The key for Warren was to deal only with people whom he was sure trusted him.

Eventually he opened multiple partnerships and partners no longer had to be his family and friends. His name was passed along like a secret with advice to “invest with Warren Buffett if you want to get rich.” But one thing stayed the same – the people who invested trusted Warren.

The reputation that Warren developed by being consistently transparent and honest with his partners became his sustainable competitive advantage. This is in addition, of course, to his highly intelligent approach to investing and phenomenally hard work.

By 1960 Warren no longer asked people to invest, they had to bring it up. This is the same strategy as Marvin Bower used for McKinsey. If the other party asks you for your service they don’t have a “prove you are worthy” attitude. You are doing them a favour and not the other way around. Of course, this is only works when people trust you, as they did in Warren Buffett’s case and in Marvin Bower’s case.

Imagine how tough it is to work for a client who does not trust you, constantly checks your work and always wants you to prove your worth? That is a pretty horrible experience.

What does this mean for your career in practical terms?

It means that at a certain point technical skills and career enhancing jewelry have declining returns.

Someone with adequate skills from an unknown school who is seen as highly trustworthy will almost always be appointed over the vastly skilled person who studied at an elite school but is seen as untrustworthy. Too many young consultants focus on technical skills and career enhancing jewelry. Yet, credibility is more important.

Think about it. Lets say you are the world’s greatest financial modeler. What does that mean?

Does it mean that when you will be 59 years old you still going to build financial models? I hope not. Because by the time you are 59 years old you hopefully should have been CEO and now chairman of the board.

A lot of young people think if they have technical skills and impressive career enhancing jewelry everyone will want to hire them. That is not true. At certain age you have to break out into managing people and leadership. And when it comes to managing people and leadership the trust element becomes crucial.

Do people trust you to follow you? Do people trust you to put you in a leadership position?

This is where a reputation for being ethical, which is earned by being consistently ethical over a prolonged period of time, leads to a formidable and sustainable competitive advantage. It cannot be won overnight via grandiose action, it cannot be bought, and it cannot be faked.

And the true, and only, test of ethics is whether you can cite numerous examples of when you left money on the table because it was not the right thing to do. Unless you  have left money on the table without hesitation, you have never lived by your values or your values are inappropriate.

You either earned it or not, so you better get started while you have the runway to get this done. And it will not be easy to do. Like Michael Porter said, a competitive advantage is not one single thing you do, but how you organize your life to produce this advantage. That means you need to change everything.

PODCASTS: It will be great if you visit our Case Interviews Podcast on iTunes and leave a review. It helps more people find us. You may also enjoy our new iTunes podcast for Executive Program audience called Strategy Skills, which you can listen to if you want to take your skills to yet another level, beyond just being ready for case interviews.

COME HANG OUT WITH US: Facebook / Twitter / LinkedIn

Image from Steven Feather under cc, cropped, added text.