How CEOs can lead the way in completing the transition to a full Human Capitalism
Over the past 50 years, Human Capitalism has steadily advanced, fueling business prosperity – and senior executive compensation. Meanwhile, employee prosperity has lagged. These two opposite trends beg the question: Whither Capitalism?
In the two prior blog posts in this series on Human Capitalism, we looked first at the huge awakenings to the power and nature of human capital over the past 50 years. Secondly we looked at the pain being suffered by the average worker and the lagging reward to that human capital, which we called the “Great Economic Disconnect.” So what should be done to fix Capitalism – and who should do it?
Human Capitalism, despite making companies successful, has not led to increased relative prosperity for its human component. If this is not addressed, then Lasn’s call for the destruction of Capitalism may well become workers’ rallying cry. (See prior blog post)
Business leaders have taken note. Klaus Schwab, founder of the World Economic Forum, cites a “lack of inclusiveness in the capitalist system”. Joe Echevarria, head of Deloitte, calls for a “Compassionate Capitalism.” Others call for “Conscious Business” (Fred Kofman) or “Conscious Capitalism” (David Schwerin – the book, and Raj Sisodia – the institute).
Here’s my take:
The first priority should be to end Crony Capitalism. The collusion of government and business, which provides financial benefits to certain companies (and thus, their shareholders) and to their senior executives, must stop. That’s a task for government. That will only happen when enough people demand it.
What’s also needed is a rethinking of the flip side of the advances in Human Capitalism outlined in the first blog post of this series on Human Capitalism. If Human Capital is fueling the wealth creation process, then the increasing “returns” created by that form of capital should be shared with those who provided it.
That I believe is a task for business – not just because business leaders are in the best position to do it, but also because it’s in the self-interest of business to take care of the proverbial “golden goose” or they’ll eventually lose the eggs – which will hurt and even put the business out of business. And the “goose” (people) by the way, will go elsewhere, where “it” is treated better.
Here’s a start at what business can and should do:
- Lower the RATIO of CEO (and other top level executives’) compensation to average worker pay: This means reducing top level pay, but maybe also increasing lower level compensation. Some CEOs have done that voluntarily. Board Compensation Committees could set a ratio and then operate within it.
- Share the PROFITS with employees. That’s being done in many companies, but other companies should learn from that and adopt similar practices.
- Share the increased VALUE of a company with employees. That’s more complicated. Stock options could be provided to all employees after a certain waiting period. Also, employees might earn stock after so many years employment.
How will this happen?
Many call for government intervention. If it’s about “righting” a wrong and making life better for people, so the argument goes, then government should create legislation or provide tax incentives that incentivize companies to do the right thing. It’s a natural tendency, especially in this era of government intervention in business. But such an argument ignores the power of the free market.
Thus others, including this writer, call for business to see its own self interest (in attracting and retaining the best talent by rewarding Human Capital) and so to reshape business so that employees share more in the profitability and increased value of the firm. (Meanwhile, government can concentrate on ending Crony Capitalism.) It is economics at work – a natural evolution of Capitalism, with Human Capital taking its rightful place alongside Financial Capital as a source (and thus also a beneficiary) of wealth creation.
To do this requires enlightened CEOs and for Boards of Directors to see their roles not in the historical perspective of representing only the financial shareholder, but also as representing employees – and customers and community as well. (And that’s not just a responsible and nice thing to do; it makes sense to include these other constituencies because these other constituencies – in this case employees –make such a huge contribution to the success and value of the business.
Thus, these changes will come about when CEOs and their Boards see these changes as in line with the true economics of the firm and therefore as a way to attract and motivate the best employees to contribute to the firm’s success. Also corporate governance needs to look at a broad array of measures of the company’s health, not just financial, but also employee, customer and community measures.
If business makes changes like those outlined above, we may well look back at the Occupy Wall Street movement as the wake-up call that triggered business to bring about the full blossoming of Human Capitalism.
Darwin Gillett is author of NOBLE ENTERPRISE:
The Commonsense Guide to Uplifting People and Profits,
a consultant and speaker and founder and
director of The Institute for Human Economics
(which will soon change its name to the
Institute for Human Capitalism).