Businesses, especially large corporations, are held in low esteem by the public – and that was even before the financial meltdown during which the US government bailed out many big financial institutions while the public watched. This does not bode well for business long term – in attracting talent, in attracting customers and keeping them happy, and in satisfying investors.
So it’s good news when a leading consulting firm – McKinsey & Company – tackles this issue. In a recent article in the March issue of the Harvard Business Review, the Review sets the stage with this intro:
“Dominic Barton, McKinsey’s managing director, argues that business must take the lead in renewing capitalism or risk losing popular and political support for the global economic system.”
Barton reports that he interviewed 400 leading business people over an 18 month period on this subject. He observed: “The near meltdown of the financial system and the ensuing Great Recession have been, and will remain, the defining issue for the current generation of executives.”
One of his major findings: that public business corporations (which are driven by Wall Street investor demands) are too short-term oriented. This is not only an old problem; it’s been recognized for many years by observers of business. But he adds, “Much of what went awry before and after the (financial) crisis stemmed from failures of governance, decision making, and leadership within companies. These are failures we can and should address ourselves.” So, if we really want to repair Capitalism, that’s where we need to look.
Paul Polman, CEO of Unilever, contributed a related piece for McKinsey’s monthly newsletter titled “The Remedies for Capitalism” suggesting that business needs more of an “inclusive” approach when it comes to creating value. Referring to Michael Porter, the long-time Harvard Business School strategy guru, he suggests we need companies to use more of a “shared-value creation” approach.
These are good ideas – as far as they go. They at least raise the issue and put it on the radar screen. As he suggests, if business doesn’t change from the inside, it may face much more draconian measures from government – at the behest of the public. And he strikes a chord when he states, “…we need a different approach to business—a new model led by a generation of leaders with the mind-set and the courage to tackle the challenges of the future.”
What might that new business “model” look like? First let’s understand how the traditional business model is built on one overriding and very powerful assumption:
That the key resource and thus (in the language of economists) the key driver of the wealth (or value) creation process is Capital. We now call that Financial Capital because we began to realize a little after the middle of the 20th Century that there was another important form of Capital – namely Human Capital. Everything about the business corporation and its relationship with Wall Street as well as its internal operations (where the first C”X”O after the CEO was the CFO, and where the primary operating documents and plans have been financial, and where its very accounting have all put finance at the core and everything else secondary) is built on that assumption. All you need do is to look at what is considered (on a financial balance sheet) as an asset – it’s financial (and physical) assets. People (cited as “our most important asset” in many annual reports) on the other hand, are accounted for as an expense, an expendable one at that!
So, to create an appropriate new business model, we need to look at what a business corporation really is, and how it succeeds.
Fortunately, a new business model is right under our collective noses in the form of businesses (public as well as private) that are doing business differently – in large part because they’ve broken away from traditional beliefs and have latched onto different strategies for building and leading a successful company.
Consider the following three books (one of which was by yours truly). Each one describes a dimension to manage that traditional companies miss or under-appreciate because they are so focused on the financial dimension. It’s not that these companies are not trying to make a profit. In each case the company or companies cited generate good profits, in some case industry-leading profitability. It’s that these other dimensions are equally important and in reality drivers of profitability.
Serving a HIGHER PURPOSE
PEAK: How Great Companies Get their Mojo from Maslow
by Chip Conley (2007)
The author shows how using Maslow (he has simplified it and applied it powerfully in his own hospitality business) can energize the staff and fuel business results far beyond the norm. This is about seeing the purpose of the company and of individual roles in it not merely as meeting a physical need, but rather in much deeper terms. Instead, for example, of viewing the purpose of his hospitality business as providing overnight accommodations to travelers, Conley views his purpose as making people feel at home. And this is extended to the housekeeping staff, which operates at high levels of Maslow’s Hierarchy of Needs pyramid.
Building TRUST with Customers
Firms of Endearment: How World-Class Companies Profit from Passion and Purpose
by Rajendra S. Sisodia, et al. (2007)
This book reports on research of companies’ practices in serving customers, finding that shareholder value thrives in companies that respect and serve their customers well, so much so that customers trust them. These companies then can “afford” not to do as much marketing as traditional companies. The author has founded the Conscious Capitalism Institute to advance the understanding and implementation of the principles of Conscious Capitalism in all forms of business and social organizations.
PUTTING PEOPLE AND CUSTOMERS BEFORE PROFITS
NOBLE ENTERPRISE: The Commonsense Guide for Uplifting People and Profits
by Darwin Gillett (2008)
What if superior business performance comes from nobility, not just from superior intelligence and great execution, but from superior character and morals? This book provides a compelling example of a company and its CEO who turned the corporate turnaround formula on its head, shifting from a financial survival strategy (just cut costs to the bone, get lean and mean, and then grow from there) to a people strategy (turn on your people, provide inspired leadership and “let” people soar.) The mission statement the CEO created for this ailing company listed the objectives in this order: 1) Customers, 2) Employees, 3) Return to Shareholders and 4) Community. This approach led to big gains in employee morale and productivity, market share and customer satisfaction – and earnings growth.
These and many other books are providing glimpses into another business reality beyond the traditional financial one. Hinting at the ingredients of a new “business model”, they point to other drivers of success than the traditional financial one. Yet ironically, their approaches tend to generate profitability far beyond what a single-focused financial strategy can generate. The best place to look for the new business model we need is to the kinds of CEOs and entrepreneurs who are seeing a different reality, building a different kind of company and leading in very different ways from their traditional colleagues.
In this way, we’ll succeed not just in repairing Capitalism, but in modernizing it to fit not only today’s challenges, but today’s realities.