00:00:08 Virtue: introduction and definition.
00:02:00 Aligning business models with cultural shifts.
00:04:41 Comparing ethical and legal corporate behavior.
00:05:14 Profits, long-term perspectives, and value roles.
00:09:32 Disadvantages of maximizing profits.
00:12:38 Corporate virtues mirrored in success.
00:14:45 Issues with advertising supply chain integrity.
00:20:00 Organizational dynamics and virtue positioning.
00:21:30 Detrimental effects on supply chains.
00:23:46 Evaluating companies’ moral elevation.
00:25:00 Corporate expectations: morality and law.
00:31:36 Evolution of Microsoft’s mission.
00:33:32 Kodak’s mission statement and clarity.
00:35:31 Capitalist ambitions shaping mission.
00:40:33 Virtue signaling’s role in branding.
00:42:46 Virtue signaling within top management.
00:45:41 Consequences of virtue signaling failures.
00:49:14 CO2 regulations in auto industry.
00:52:25 French diesel engine compliance.
00:55:46 Dieselgate scandal analysis.
01:00:23 Early 20th century class action.
01:04:05 Greenwashing and freedom of expression.
01:07:01 French consumer rights and contracts.
01:10:11 Skepticism towards sudden sustainability claims.
01:12:31 Personal anecdotes and product price evolution.
01:16:59 Why do consumers seek moral cues from companies?
In a comprehensive discussion spanning philosophy, law, ethics, and economics, Conor Doherty and Joannes Vermorel, Lokad founder, dissect the role of virtue within corporations and supply chains. Vermorel articulates the necessity for corporate values that benefit not only the company but also its employees and society at large, for long-term profitability. He highlights the importance of legal frameworks to balance profit-seeking and societal good. Vermorel explores challenges in long-term growth strategies, talent retention, and the intersection of internal and external values, especially for multinational corporations. He critiques virtue signaling as often disingenuous and unnecessary. Ultimately, Doherty is somewhat skeptical about the space for virtue in business, yet Vermorel is more sanguine and posits that corporations can’t merely pretend to uphold virtues but must genuinely live up to them.
The discussion begins with Conor Doherty, the host, asking Joannes Vermorel, founder of Lokad, about the concept of virtue in the context of corporations and supply chains. Vermorel argues that virtue pertains to a company’s values which are integral to its performance, efficiency, and profitability. He emphasizes that for long-term success, it is crucial for a company’s actions to be beneficial not only for itself, but also for its employees and society at large. Vermorel acknowledges that there may be instances where a company’s interests diverge from those of its employees or the public, but suggests that these situations are difficult to sustain.
When asked how a business model focused on profits can reconcile with shifting societal values, Vermorel posits that this is not entirely a company’s responsibility. Instead, he points to the role of legal frameworks and regulatory bodies in ensuring that companies operate in a manner that minimizes harm to society and the environment. He adds that these frameworks aim to prevent companies from exploiting loopholes for short-term gain at the expense of long-term societal losses.
Vermorel further articulates that companies, in the short-term, strive to maximize profits, but these frameworks are designed to prevent profit maximization from resulting in widespread damage. If a company does cause damage, regulatory mechanisms, such as taxes or reparations, exist to manage this. However, he asserts that for companies aiming to maximize profits in the long-term, numerical performance indicators become less reliable as future market changes are unpredictable.
To navigate these uncertainties, Vermorel suggests that companies need to rely on non-numerical criteria like their core values. These values, he says, are more enduring than immediate performance indicators and can guide a company’s long-term decision-making. Moreover, they serve as a vital tool for attracting and retaining talent, as potential employees are drawn not only to a company’s financial prospects, but also to its purpose and ethos.
He identifies two challenges that companies face in this regard: first, the limitations of profit maximization as a strategy for long-term growth and, second, the need for a compelling mission to attract and retain talent. If a company’s only promise to its employees is a salary, and the work itself lacks a sense of purpose, it becomes difficult to attract and retain talent, and the company may end up paying a premium in salaries.
Vermorel also underscores the distinction between internal and external values. While internal values guide a company’s operations and serve as a framework for employee behavior, external values, when propagated, can become a point of contention. Particularly for multinational corporations operating across diverse cultural contexts, reconciling internal values with differing external ones is a challenge.
The conversation shifts to corporate virtues, specifically virtue signaling, where companies broadcast their values, often as a strategic move to portray themselves in a favorable light. Vermorel notes that this kind of messaging often provokes skepticism about the company’s true intentions. Rather than overtly advertising high-integrity values, Vermorel advocates for embodying virtues through excellent service or product delivery.
Furthermore, Vermorel questions the effectiveness and authenticity of virtue signaling, suggesting that it is often a ploy for power within a company rather than a genuine attempt to do good for society. These machinations, he claims, tend to thrive in complex, opaque environments like supply chains, making them harder to fight against.
However, the interview acknowledges that some might argue virtue signaling in supply chains could have positive impacts on society. Vermorel expresses skepticism about this claim, suggesting that such moves are usually more about theatrics than real, measurable impacts.
Challenging the necessity of publicly proclaimed virtues, Vermorel argues that companies acting within legal and ethical bounds have met their obligation to society. He criticizes the communication of obvious virtues as information-free platitudes. When a company claims high integrity, for example, it’s stating an expectation, not a differentiator. This kind of communication, Vermorel posits, risks alienating existing staff who have already been operating with high integrity.
Joannes Vermorel elaborates on the difficulty of having a clear mission and how it can often lead to a focus on secondary attributes, such as quality or ease of use, which should ideally be the consequence of the mission. Vermorel cites the historical mission statement of Kodak, “you press a button and we do the rest”, as an example of a brilliant and simple mission statement.
Doherty then discusses the capitalist ambition of Microsoft’s mission, wondering why it can’t just be replaced with another capitalist ambition. Vermorel argues that the goal is to create a framework that is resilient to bad actors and benefits the greater good. He uses the market as an example of a filter that weeds out companies that fail to uphold their corporate virtues, and argues that this system has been successful in doing so.
The conversation then moves to the subject of virtue signaling within companies, which Vermorel believes is a power-grabbing move made by individuals within an organization. He mentions that companies with valuable brands are particularly vulnerable to this, as their brand depends on a widespread perception. He suggests that virtue signaling often involves claims that are impossible to verify or check, unlike concrete metrics such as profit growth.
Doherty asks if there are any examples of companies knowingly engaging in deceitful activities through virtue signaling. Vermorel cites the example of Elon Musk’s acquisition of Twitter and his promise to make it a platform for greater freedom of expression. Vermorel suggests that time will tell whether this is genuine or virtue signaling, but cautions that if the promises are not delivered, the entire brand could be at risk. He differentiates between virtue signaling internally within a company and messaging intended for the broader market.
Vermorel then discusses the regulatory push against CO2 emissions from vehicles. He points out that the process of making vehicles more efficient has been an ongoing initiative by manufacturers, and the regulations didn’t introduce anything new. Instead, he sees these regulations as a form of virtue signaling. Vermorel explains that reducing CO2 emissions results in a more efficient combustion process, but at higher temperatures, it leads to the production of nitrogen oxides, which are toxic in lower quantities compared to CO2.
In an attempt to comply with regulations and produce vehicles that emit less CO2, manufacturers, particularly in France, started producing diesel engines for smaller vehicles. This decision was largely driven by regulations and had little to do with market demand or vehicle efficiency. Vermorel describes this as an example of misguided regulations creating problems. If manufacturers try to strictly adhere to these regulations, they might end up causing other environmental issues, like nitrogen oxide pollution.
The interview then shifts to the diesel gate scandal, where manufacturers cheated emission tests. Vermorel views this incident as the culmination of rigid regulations, technological constraints, and organizational failures. He also criticizes the vague nature of the regulations that left too much room for interpretation, creating ethical gray areas.
Vermorel explains that there’s often a tension between companies’ bottom lines and their professed virtues, with the former typically winning out. He argues that genuine corporate virtues can’t really conflict with a company’s long-term interests because those interests should align with society’s interests. As an example, he mentions IKEA, which has been replanting trees to maintain its long-term operations.
He maintains that when there is divergence between a company’s long-term interests and those of society, regulations need to be adjusted. Vermorel points out that this adjustment process is ongoing and requires continuous refinement to address new ways companies find to exploit the system. He cites the invention of class action lawsuits in the US as an example of this kind of refinement, where a new legal mechanism was created to address widespread but individually small damages caused by companies.
Doherty and Vermorel proceed to unpack the concept of truth in advertising, prompted by a court case regarding an ‘unlimited’ internet connection. Vermorel describes how the judge awarded damages to all but one of the plaintiffs, an engineer, arguing he should have known better than to expect truly unlimited service. He draws a parallel to unlimited offers like free Coca-Cola, emphasizing the general understanding that ‘unlimited’ does not literally mean without limit.
The discussion then transitions to contracts, with Vermorel talking about how the ability to understand what’s written in a contract can influence its validity. He also mentions how this principle can lead to some bizarre outcomes in French law, noting that a judge could declare clauses in a contract invalid if he deems that the signee, due to a lack of intelligence, couldn’t understand them.
Vermorel warns about companies placing themselves on a moral pedestal, urging listeners to question whether these companies were previously ‘unsustainable.’ He suspects that most such claims are theatrics and political games that could disrupt efficient supply chains. He explains that supply chains are intricate systems that deliver great value to customers, making products significantly cheaper than they were a few decades ago. These systems are also fragile and can be disrupted by external factors such as lockdowns or tsunamis, or self-inflicted factors like virtue signaling.
Vermorel then argues for the need to denounce virtue signaling early, warning that letting these games play out could lead to self-inflicted disasters in the supply chain. He stresses the importance of not rewarding those who engage in such behavior.
Finally, Doherty concludes with a philosophical question about why consumers look to companies for moral cues. Vermorel doesn’t see this as misguided; instead, he believes it’s part of a framework that motivates profit-driven companies to behave ethically. The expectation from the public for companies to behave well can drive loyalty to a brand. Vermorel argues that while some might see this as mere appearance, it can be challenging to maintain a facade on a grand scale. Eventually, he suggests, the only way to deliver what is promised is to genuinely live up to the promise.
Conor Doherty: Aristotle defined virtue as a characteristic sitting equidistant between two extremes namely excess and deficiency. Unfortunately, he didn’t write very much about corporate virtue signaling. Fortunately, in the studio today I have the very next best thing: Lokad founder, Joannes Vermorel. Good day, sir. To set the table long before we get into the satellite discussion of virtue signaling, what exactly is virtue in the context of corporations and supply chains?
Joannes Vermorel: In the context of corporations and supply chains, virtue refers to the underlying values that have a strong affinity to your performance, efficiency, and ultimately your profit. All those elements that are good for the company usually benefit the company, its employees, and the wider society if you want to have something that works over the long term. There are situations where these elements may become disjointed, benefiting the company but not the employees or the public. However, it’s typically challenging to sustainably operate with this disconnect over time. Essentially, virtue is the embodiment of the prime values that contribute to the survival of your company, ensuring its growth and profitability over time.
Conor Doherty: How is it possible to reconcile a capitalistically driven model such as a business or a supply chain that deals in business with the values of a culture which shift over time, whereas profit and bottom line, well, that’s static. That value, if it is a value, doesn’t change; making money more than you lose money stays the same, but values shift.
Joannes Vermorel: That’s a complex question. It’s not entirely the responsibility of the company. The way modern western societies and markets have been engineered, they don’t operate in a vacuum. We have legal frameworks to operate the companies, and these frameworks are designed to have an actor act responsibly. If a company creates widespread damages for societies, the environment, or people, regulations prohibit it, or there are judicial mechanisms for reparations.
This broader framework should prevent chasing profits while causing a net loss to society at large. Legal frameworks attempt to prevent such behavior. The technical term in economics is ’externalities.’ For example, if you create diffuse damage, you may have to pay a tax used for reparations, or you may have to comply with certain regulations designed to limit the externalities you can inflict on society.
However, this is a rather short-term viewpoint. If you’re a company and you want to maximize your profits, how do you go about that? One might argue it is just a matter of maximizing some KPIs, but it’s more complex in the real world.
The further into the future you look, the more elusive your performance indicators become. Maximizing profit for the next week can be relatively obvious with reliable metrics. However, as soon as you look further into the future, these indicators become very fuzzy. Most businesses lack a clear-cut long-term perspective, and profit maximization becomes difficult due to the increasingly fuzzy and irrelevant numbers.
That’s why many successful companies don’t operate on the premise of immediate profit maximization. It’s very short-sighted. They often became successes because they had a long-term view, which required a non-quantitative, values-based criterion. These values are much more durable and can last much longer than immediate performance indicators.
In order to succeed, a company needs to attract people. Sure, you can attract people with salaries, but if the only thing you can promise to your employees is a paycheck and their work doesn’t make any sense at all, it’s difficult. You’ll actually end up paying a premium for that. Companies can still hire people even if their practices are viewed as amoral, like the tobacco industry for example, but it’s very difficult for employees to genuinely believe they’re making the world a better place if they work in such industries.
There is a real cost to this. A company that is seen as amoral will have to pay substantial premiums on the salaries of its employees and will have a harder time retaining people or attracting them in the first place. So, you can see profit maximization doesn’t work very well when you look five or ten years down the road. It is very short-sighted. Also, if you want to attract the people that you need, it’s not exactly a compelling message.
If the only thing that you have is this sort of profit maximization, then you will end up with a very basic problem that it’s not such a great message. When you join these two things together, this long-term vision and a meaningful message, it’s beneficial not only in guiding your actions into the future but also serves as a PR message for hiring purposes.
Conor Doherty: That distinction you’re making presents those values as inwardly directed, for recruiting people to our company. I think most people are fine with that. The bone of contention arises when those values are propagated or directed outwardly. If you take a multinational company or a supply chain, an enormously geographically distributed network of actors across different cultures with different standards and interests, these don’t always align. How does a company reconcile their internally directed values with the external perception, once you open the door to the world and people outside can see?
Joannes Vermorel: The interesting thing about these corporate virtues is that they have a self-prophecy effect. If your company embodies these virtues—excellency, diligence, integrity, ingenuity, and others—then you will succeed in the market. That’s pretty much a given, except in corrupt situations. Success itself is the reflection of whether you embody these virtues. If you fail, you probably failed somewhere along the line and that’s why your competitors are succeeding.
The biggest proof that the virtues are there, and their biggest manifestation, is just the success of your company. If you have large-scale success, it’s probably because you’re doing tons of things right. Your success demonstrates in a way that you truly embody these corporate virtues.
The puzzling thing is when people in the company start to intensively signal and communicate on a select few virtues. For complex things like supply chain, this is particularly puzzling. If you say, for example, high integrity is important, I can agree. High integrity standards are a good thing for operating a large complex supply chain. But, if you have people starting to say “we are going to be a high integrity company,” there are plenty of problems with this proposition. The first problem is, what about yesterday? Weren’t your predecessors people of high integrity?
If your company managed to become large and successful, probably the people who were there before you were doing things that were kind of correct. It’s very difficult to succeed, especially when operating large-scale supply chains, and that doesn’t happen by accident. There are those instances where you might have Silicon Valley startups with lifestyle apps that strike it lucky. Just by doing things a bit haphazardly, they become very successful. These things mostly don’t happen in the world of supply chain. A Silicon Valley startup with a lifestyle app needs to do a few things right to succeed. If they do, they can take substantial market share on something simple. An archetype of that would be the early success of Twitter, an incredibly simplistic app. It succeeded because it had a very clever idea of limiting the length of messages, but apart from that, it was very simple.
In the context of supply chains, where you need to do thousands of things right for it to work, success is much less accidental. That’s why there are very few overnight successes in supply chain companies operating gigantic supply chains. This typically is a task accomplished over decades. Even Amazon, one of the fastest companies of all time, took almost 30 years to become the supply chain giant it is today. It’s not an overnight success.
But what about your predecessors? That’s the question, and it prompts another one - what do you intend to achieve? That’s the first question that comes to my mind when people begin communicating about virtues. What’s the intentionality?
Conor Doherty: At what point do corporate virtues teeter into negative virtue signaling? I mean, you can signal high integrity and diligence, but people might ignore that. At what point does it become problematic for, let’s say, the public?
Joannes Vermorel: Well, I would say it becomes problematic from the very beginning. You see, the gist of it is - show, don’t tell. You just deliver an excellent service, or you manufacture excellent products that match the expectations of your clients. That’s the embodiment of those virtues. You don’t necessarily need to advertise high integrity values for your organization.
When people start to broadcast a specific set of values, the intentions are usually not good at all. It’s very rare that you have the intentions where you had a real problem before, and now you have to make amends and become better after a spectacular failure. This can happen, but it’s not the dominant pattern. The dominant pattern I see is when some parties within the organization start to broadcast high integrity, high sustainability, high whatever virtue. It’s a move to position themselves on a higher ground compared to other people within the company. It’s not directed at the competition. It’s about gaining more ground within the organization.
It becomes very damaging for supply chain due to its ambient complexity, opacity, and distributed nature. It means that these sorts of shenanigans are much harder to counter as opposed to a transparent and obvious playing field where it’s much more visible that some parties are playing these little political games.
Conor Doherty: It occurs to me that internally, that could be exactly the case. You have people deploying Machiavellian machinations to rise up the corporate ladder and instituting policies that are just for self-gain. However, externally, they might have wonderful impacts on society and the general public. So then, isn’t it possible or is it possible that corporate virtue signaling and supply chain can actually have a positive impact?
Joannes Vermorel: That’s where I’m very skeptical. If you start looking at that and you realize that it’s a power-grabbing scheme, you’ll find that the broader impacts are mostly theatrics. If you were truly elevating the morality of society at large, that would be brilliant, but is it really what you achieve? Is that the case?
This moral high ground is also something that is incredibly difficult to challenge. How are you going to check whether there’s anything real in those sorts of statements? If you’re looking at profits within the company, you can have a division that is more profitable than another one. You have tangible elements to check that. But if you start to say, “You can’t judge me on the profits or growth that I generate, but on this super elusive elevation of morality”. It’s suddenly incredibly difficult to assess that because how do you define that society at large has become more sustainable? I’m not saying it’s not possible. It’s just orders of magnitude more difficult to achieve that as compared to just checking whether you’re making an impact in the market, where people seem happier with what you’re delivering, and it shows in your basic performance indicators, like growing sales and steady profits.
Conor Doherty: Just to continue playing devil’s advocate, some might argue that it’s inherently nonsensical to expect morally virtuous actions from a company. If your company operates within the bounds of law, complying with labor codes, environmental regulations, and production standards, have you not met your obligations to society?
Joannes Vermorel: What’s wrong with that? My first point would be a tangential objection. When you communicate something, you’re supposed to have a message in the first place. If you have no message, you’re just emitting white noise with no information flowing whatsoever. That’s bad communication. You need to communicate something. Let’s say, for example, we communicate that we are a high integrity company. Why do you think there would be people operating in the market saying we are a low integrity company and we are proud of that?
The problem with virtues is that no one advocates for the opposite. If you’re making a statement and the opposite of your proposition is nonsensical, such as, “We are a low integrity company and we are proud of it,” then the original statement, “We are a high integrity company and we are proud of it,” is a platitude. It’s obvious. It’s like communicating something that is information-free, essentially a platitude.
Conor Doherty: This reminds me of an anecdote. A few Christmases ago, my brother and his girlfriend were back for dinner. During the course of the meal, my brother’s girlfriend said something or misspoke in some way, and my brother commented “you know, I could have said something very funny at your expense”, and his girlfriend responded immediately, “What, do you want gratitude? I’m not going to thank you for not being a bad person.” Your litmus test just described this situation. I’m not going to shower approbation and praise on you for doing the minimum that I expect from you in accordance with law and basic social standing.
Joannes Vermorel: Yes, and again, good communication is supposed to be meaningful for all parties receiving the message. Let’s revisit the case of high integrity. If you operate in a place like Denmark, one of the least corrupt countries in the world, communicating high integrity seems redundant. Are you intending to deliver even more integrity than what has ever been achieved anywhere in human history? That’s a bold claim and probably not realistic.
On the contrary, let’s say you operate a business in a place that is generally very corrupt, like Lagos, Nigeria. Then that’s a completely different story. It really depends on the context, but generally, I would say if the message communicates something obvious, then I agree, this is not good messaging.
If you communicate something like, “We are now a high integrity company,” what about all the people that were already in the company and were generally people of high integrity? Now they are branded as being people of low integrity. This can be incredibly divisive and harmful inside an organization that, if it has become very large and successful, was probably already doing many things in very virtuous ways.
Conor Doherty: Is there any demand from the public for big companies, or for supply chains, to be virtuous, or is this purely an internal dynamic? What is another situation in which the same mechanism could arise?
Joannes Vermorel: I think there is a demand from the public to have companies that, in general, have missions that make sense. Maximization of profits is only a short-term instrument, just because if you look 10 years ahead, your metrics are too weak. You can’t mathematically maximize anything when you have indicators that are super fuzzy five to ten years down the road.
There’s also a need for this kind of messaging to make sense for hiring people because otherwise, you’re going to pay a much higher salary. You’ll have to pay a premium to compensate for your lack of vision about what people are going to do, which can have very real consequences.
For instance, a company that, at some point in its history, lost sight of what it’s supposed to do. This happened in the software industry to Microsoft. Their mission statement, from its early inception in the ’80s, was to put a Windows operating system in every house in the United States. They went incredibly beyond that by putting a Windows operating system in every house on the planet, not just in the United States. They were even thinking to the point where they had accomplished that, so they asked what was left to be done. They had to reinvent that and had this kind of lost decade from 2000 to 2010, where they didn’t really know where they were heading. They accomplished their mission, but what’s next? It took them a decade to reinvent themselves. Having a mission is something that is very difficult. It’s about finding your purpose in corporate life, not obviously the life of your employees, but as a corporation. What is your general mission statement? What are you chasing?
If you have a good mission, such as Microsoft’s “operating system in every house” or Kodak’s historical mission statement, “you press a button, and we do the rest,” these are brilliant mission statements. They are catchy, simple, and meaningful.
However, it’s difficult to have something like that, and instead of focusing on that, some companies go for an ersatz. This is a low-quality approach, where instead of having a mission statement, you directly advertise the attributes that are normally just a consequence of your mission statement or your grand vision for your supply chain. This means looking at secondary emergent properties that reflect that you have something valuable in the first place.
Conor Doherty: It strikes me that the example you gave of Microsoft putting a computer in every house in America, that’s a capitalistic ambition. You actualized that, what comes next? You need something else. My point here is that what’s wrong with just substituting one capitalistic ambition for another capitalistic ambition devoid of any quasi-philosophical values?
Joannes Vermorel: From the perspective of society, the idea is that we want to have a framework that is very resilient to bad actors. You don’t want a few bad apples to be able to ruin everything for everyone. The individual decisions made by everyone result in a greater good and the market weeds out on its own the bad actors. Overall, it’s very successful. There is a vast list of companies that have gone bankrupt just because they failed at upholding the virtues of remaining competitive. The market, a collection of all those individual decisions, naturally leads to outcomes that benefit people. When a company goes bankrupt, there is a severe downside for the people in this company. Transitionally, it’s going to be difficult times because they will need to find another job, etc.
Conor Doherty: That’s a perfect segue in terms of specific sectors. We already mentioned tech. Are there any sectors that are particularly prone to virtue signaling or susceptible to this kind of framework?
Joannes Vermorel: I suspect that companies with very valuable brands are particularly vulnerable to virtue signaling. It’s a power-grabbing move made by people within the organization to appeal to the CEO, the board, and the upper echelons of the company. However, if you’re a very low-profile company that operates B2B and isn’t overly concerned about societal perception, virtue signaling might not be effective. As the CEO of a B2B company, you might personally know the top 50 CEOs of your client companies. You may have met them, shaken hands and whatnot, so you can have literally a one-to-one relationship with all your notable clients.
If you have a B2C brand, where you have millions of clients, you don’t, so you have a very diffuse perception of your brand. If there are people within your company advocating for values like higher integrity, sustainability, diversity - pick any value - saying they elevate everything and are helping to enhance the perception of the brand by the population at large, it is a powerful message. For the CEO, it is difficult to dismiss this because the brand relies on widespread perception. However, this is a power-grabbing move as these claims are almost impossible to verify, unlike profits where growth and success can be more concretely measured.
This sort of assertion, saying “we’re elevating the ambient morality of the society around us” is a very extravagant claim. Extraordinary claims require extraordinary evidence, as LaPlace said.
Conor Doherty: Our conversation has thus far focused on individuals and the idea of power-grabbing within the framework of a company. Are there examples of companies, top-down, engaging in misleading activities with the public through virtue signaling, things that had negative consequences, but the company knowingly engaged in them?
Joannes Vermorel: It can happen, but it’s difficult if you don’t follow through with what you advertise. One example is Elon Musk’s acquisition of Twitter. Musk widely broadcasted his intention to make Twitter a freer place for expression, a bold claim, and essentially a top-down statement. We might question whether it’s virtue signaling or not, but if top management doesn’t deliver on their promises, the entire brand can be at risk. From the top, these can be viewed as games played with the public, generally a game played with clients or the public at large. It’s different when a division says “we are going to be a high integrity company”. This message is intended more for the company itself, even if it’s publicly broadcasted. In Twitter’s case, only time will tell if it’s genuine or just empty promises.
Conor Doherty: There are recent examples of companies misleading the public, such as car manufacturers fitting their cars with technology to give the impression that they’re emitting less CO2. Is this an example of corporate and supply chain virtue signaling gone wrong?
Joannes Vermorel: To some extent, yes, but we need to look at the broader picture. The dieselgate scandal is very interesting because there is a series of people involved, starting with the regulators in Europe and the US. I understand the problem to be that regulators in Europe and the US aim to appear morally superior in terms of sustainability and environmental concerns. These are valid worries, of course. However, you want to have the higher ground, so what do you do? You implement a cheap set of regulations. I say “cheap” because creating a set of regulations costs you the time it takes to write them. But for society at large, enforcing these regulations and ensuring compliance can have an enormous cost.
Initially, we had some sort of regulations fighting against CO2. Whether it’s a good or bad thing, that’s a separate debate. But the idea was regulators in many countries wanted vehicles that emit less CO2. Was this wise? That’s another debate, but there was clearly an intent to virtue signal.
If you look at the history of vehicles, car manufacturers have made massive investments to make their vehicles more efficient and less wasteful over a century. This process began well before these regulations and continues even after they were passed. The regulation didn’t singlehandedly shift vehicles from being bad to good. Instead, it was part of an ongoing technological progress that has been occurring over a century. So there’s an original sin that starts from the regulators. Now we want to reduce CO2. What’s the problem with reducing CO2?
My basic understanding of chemistry is that if you want a very efficient combustion, thus less CO2, you need to have very high temperatures. However, you end up with byproducts like nitrogen oxides. Nitrogen oxides are toxic, unlike CO2 which is pretty much non-toxic unless you reach very high percentages. For a healthy person, CO2 is non-toxic up to about four percent, but the human body is very resilient to CO2. We can tolerate up to something like four percent and even more if you’re healthy and don’t have damaged lungs. Nitrogen oxides, however, are toxic even in very low quantities.
And what happens because of that? Due to these regulations, we end up with bizarre situations. For instance, in many countries like France, manufacturers ended up producing diesel engines for small vehicles. This was more about ticking boxes on the list of regulations. Markets that didn’t have this sort of virtue signaling regulations had much lower rates of diesel cars. In France, a decade ago, even small cars were about 55 percent diesel. In almost any other market, it was at most 25 percent for small cars. Diesel engines are more expensive, heavier, and have many other downsides.
So we have these sorts of regulations where we say, “We give you a KPI which is just maximization.” Regulators can easily push regulation. Enacting a new law is relatively cheap. You merely decide that this is the law. The issue arises when you have car companies that are aware of other concerns they need to address. For example, nitrogen oxides are a big problem, but the regulations are more lenient. If a company goes too far in the direction of the regulation to reduce CO2, they create another problem which is legal but not very moral.
It creates a gray area. If you’re an employee in a large car manufacturing company and you design an engine, you can either be completely compliant with the law, doing a great disservice to your customers, or you can be not entirely compliant with the law, doing something that, in your view, is a better trade-off. The problem is that when you blur the lines, things become gradual. Regulators start with original virtue signaling, then car companies can double down on this game. They advertise and engage in an auction mechanism, making an even higher bid compared to what the regulator already made.
People then face impossible constraints because it’s beyond what technology can actually deliver. Plus, if regulations go very far, you end up in a situation where people have no choice but to diverge a bit or take leeway compared to the way it’s phrased. Everything becomes gray, and that’s the danger. If your organization ends up with people that accidentally have very low integrity, you have all the perfect ingredients for a disaster like the dieselgate scandal.
You have regulations that are super strict to the point of being unrealistic. You have genuine concerns that are not addressed. If you address them, you’re not rewarded by the regulators. You then have people that know they have to operate all these trade-offs “under the hood.” Then you have people of low integrity who have the perfect intellectual excuses to lie to themselves, saying, “Well, you know what, I’m just lying, cheating, but it’s for the greater good because everything is kind of blurry and messed up, so it’s okay.”
And then it takes proportions like the diesel gate, where there were literally people who engineered the cheat and were just lying to the public on a grand scale, and that was very, very bad. I see that not as an isolated incident. That was a series of people who were morally disempowered and played these virtue signaling games, which was bad. There was a whole series of people playing these games until you reach a point where you had people of low integrity, who had the perfect ingredients in place to do very, very bad things with a lot of impunity for a very long time. Obviously, now things have been unfolded. Justice will probably be done, but a long time after the problem. And we still face the fallout from the diesel gate, which was pretty bad.
Conor Doherty: Some would argue that this sort of demonstrates the blue sky thinking behind virtue signaling because it’s easy when things are going well. But the moment there’s a trade-off from a business perspective between “here are the new regulations” and “if we want to meet them we have to sell fewer cars,” they will opt for their bottom line. Doesn’t that demonstrate how delicate or fragile this entire concept is?
Joannes Vermorel: Again, corporate virtues that go against the bottom line probably indicates something wrong. If you look at true corporate virtues, they can’t really go against the bottom line. Your long-term interest for your company is aligned with the long-term interest of society. Take IKEA for example. They didn’t wait for regulations to start replanting trees. When they’re cutting down forests to build their furniture, they’ve been mindful about sustainability. Would IKEA eliminate all the forests in Europe? No, because they’ve been planting trees for a very long time. They know that if they want to still be able to operate 20, 30, 50 years down the road, a forest that they cut now needs to be replanted. This seems basic but it’s self-interested.
Conor Doherty: But doesn’t that accomplish two things? It’s self-interested, but also contributes to the greater good.
Joannes Vermorel: Yes, I would say the situations where the long-term interests for the company and the public at large diverge are rare. I believe that’s a testament to the sort of framework we have right now, which allows our industrial civilization to operate. We have managed to solve the challenge of aligning corporate and societal interests. This is an idea that emerged in England and Scotland two or three centuries ago. The Wealth of Nations by Adam Smith posits that selfish interests can, with the proper framework, coincide with the long-term interest of society. When it is not the case, well, you adjust the regulation. That’s why those regulations are very empirical and expedient. Sometimes you need to invent new things.
For example, in the early 20th century in the USA, they invented the idea of the class action. What if a company does something bad that impacts millions of people but just a little bit, so no one wants to sue because the damages are small? This was a justice principle clarified more than two millennia ago by the Romans: if you cause damage, you have to pay reparation. But what if you do a tiny damage to millions of people? Nobody has proper motivation to sue you because the reparation that this person will get will be very small. What the United States did was they invented a new mechanism: class action. People can join together so that you can aggregate the damage, and so you can sue a company for damage that is otherwise very diffuse.
So the way I see it, making the long-term profits of a company coincide with the long-term interest of society is not a given but is not an accident either. It may diverge, but the fact that we mostly have something that overall tends to coincide is because it took literally centuries of refining the frameworks. This is a work in progress. There will always be companies that discover new ways to abuse the framework. People have to think not necessarily about new regulations, but sometimes even about new judicial mechanisms like class action. It requires an entirely different class of justice mechanism to address the problem.
Conor Doherty: Well, from my understanding, and just as you’re not a chemist, I’m not a lawyer. My understanding of French law is that it’s also evolving to reflect the fact that greenwashing is becoming much more common amongst companies. But most penalties that are allocated now are under just false advertisement because there is nothing on the books to really reflect the class of problems we’re discussing here.
Joannes Vermorel: That’s very interesting because France has a very different approach to freedom of expression compared to, let’s say, the US. First, we have much less freedom of expression. We don’t have the First Amendment. It doesn’t mean that France is a totalitarian state where there is no freedom of expression, far from it. But clearly, on this spectrum of countries, France is not in the first tier. It’s probably in the second tier. A key aspect here is the different interpretation of the right to free speech, which in the US includes the right to be misguided, and even the right to lie. While French law mostly agrees with this, it diverges significantly when it comes to consumer protection. There’s a body of law here specifically aimed at protecting consumers, even from their own ignorance or gullibility.
Conor Doherty: Could you give us an example of how this works?
Joannes Vermorel: An interesting case happened about fifteen years ago. An internet service provider was advertising “unlimited” internet connections. However, if a user exceeded a certain amount of data, their speed was throttled. There were about 20 plaintiffs. The court ruled that the company had lied to the customers, and thus had to pay damages to most of them. However, one of the plaintiffs was an engineer. The court decided that he should have known better, and thus was not entitled to damages.
French law also has specific regulations around contracts. The concept of ’enlightened consent’ is crucial. The judge has the power to declare certain clauses in a contract invalid if they believe that one party didn’t fully understand them. This can lead to interesting rulings, like the judge saying, “You’re a very stupid person and you don’t understand what is in this contract you just signed, so these clauses are invalid.”
What constitutes a lie in France also depends on whether people can perceive the lie or not. For instance, a company that sells lottery tickets had an ad stating “100% of lottery winners bought lottery tickets.” While factually true, it was ruled as misleading because it could be misunderstood to mean that everyone who buys a ticket will win. This is why I say that France has a peculiar relationship with freedom of expression. It’s quite different from the North American perspective.
Conor Doherty: Interesting. So how can our viewers, especially those not well-versed in such matters, identify greenwashing or virtue signaling from genuinely sincere initiatives, particularly in supply chains?
Joannes Vermorel: In supply chains, be wary of companies that suddenly put themselves on a moral pedestal, especially if they’re promoting virtues that were absent before. If someone says, “Now we are a sustainable company,” challenge them. Ask whether they were unsustainable before. More often than not, their predecessors were not intentionally pursuing misguided, unsustainable goals. If there’s no valid cause for concern about their past practices, there’s a high chance that the new claims are merely theatrics or political games. This kind of behavior can disrupt things that are actually working in the supply chain.
Conor Doherty: So, the stability of the supply chain is crucial.
Joannes Vermorel: Be skeptical of those who put themselves on a moral pedestal, particularly if they’re advocating for virtues they weren’t practicing before. For instance, if someone claims their company is now sustainable, ask if it was unsustainable before. Were their predecessors pursuing unsustainable goals? Occasionally, this might be true; large companies can have divisions that were problematic. But, more often than not, it’s just theatrics. If the opposite of what they’re promoting wasn’t a genuine cause for concern before, there’s a high chance they’re playing political games. Disruptive changes might actually harm functioning supply chains. People often overlook how challenging it is to keep large-scale supply chains running, as evidenced by the disruptions caused by lockdowns. These supply chains provide immense value and deliver products at a fraction of the cost they were 50 years ago.
For instance, when my parents began their career at Procter and Gamble, they told me that as young executives joining a very affluent North American company in Paris and earning high salaries, they had to spend their entire first month’s income just to buy their suits. Nowadays, if you’re someone in Paris earning a decent salary, with your first month’s salary, you can buy not just one suit, but something like 20.
When they had their first child, which was me, they wanted to buy a stroller. At the time, it was just too expensive for them, so they bought a second-hand stroller. Now, you would think of a stroller as something you could get at Walmart for probably under $100. It’s cheap. This is not something that people in the top six percent income bracket of a reasonably wealthy country would need to buy second-hand.
The fact that products like strollers are so cheap that nowadays even a person earning minimum wage could afford a new one is a testament to those well-oiled supply chains that do incredible things, such as assembling, packaging, shipping, and delivering complex products that require materials from all over the world at a super low cost. This isn’t just due to cheap labor somewhere in the world. You need a lot of automation and a highly automated and reliable process along the entire chain. Otherwise, these things would be very expensive, even if produced in a super low-cost country.
Supply chains, despite performing difficult tasks excellently, are fragile against certain problems. Some problems can be external, like lockdowns or natural disasters. However, virtue signaling can create mini self-inflicted disasters. Unlike external disasters over which you have no control, virtue signaling, if denounced early on as theatrics that pose a risk and should not be rewarded, can eliminate these potential mini disasters that are likely to occur if such games are allowed to continue in your company.
Conor Doherty: As we begin to wind things down, I have one final question. We opened with philosophy, let’s close with philosophy. Why do you think some consumers look to companies and supply chains for moral cues? I don’t particularly care or look to musicians or actors for moral cues or moral guidance, nor do I hold them up as paragons of moral virtue. Why do people have such strong expectations of moral behavior from enormous, profit-driven companies?
Joannes Vermorel: It’s part of the framework that causes profit-motivated companies to do the right thing. If companies do shocking things, it’s going to damage their brand. Large companies are terrified of this and do whatever they can to prevent rogue subdivisions from damaging the entire organization. It’s one of their worst fears. As consumers, we expect companies to behave well and reward those we perceive to be well-behaved by being more loyal to them.
Some might argue that some companies only pretend to behave well to appear better, but the reality is that performing theatrics on a large scale is very difficult. Eventually, the only way to deliver what you promise is to actually do it. For instance, McDonald’s could claim not to poison people, but if the statistics showed a different story, it would not take long for the truth to come out. In conclusion, while it is a reasonable expectation for companies to behave ethically, they should not overly play the virtue signaling game. It’s a dangerous one, and it’s very difficult, if not impossible, to outcompete peers based solely on virtues.
Conor Doherty: On that note, I’ll draw things to a close. Joannes, thank you very much for your time. I very much enjoyed our stroll around the Agora. And thank you very much for watching. We’ll see you next time.