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?

Fixing Capitalism

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:

1. 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.
2. Share the PROFITS with employees. That’s being done in many companies, but other companies should learn from that and adopt similar practices.
3. 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).

A Human Capitalism has emerged over the past fifty years. As discussed in the prior post, that has helped some companies succeed far beyond those who don’t value the human ingredient. However, there is much pain on the part of the average worker, which has led to a Great Economic Disconnect. Some leaders even say they want to destroy Capitalism, the latest being William Ayers. In this post, we’ll examine what’s hurting the average worker and why the Human Capitalism movement has some “unfinished business” to attend to.

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 have led to a Great Economic Disconnect (see chart) and beg the question: Whither Capitalism?

This piece is about the (R)Evolution of Human Capitalism. It is broken into three parts:

Part I: The Emergence of HUMAN CAPITALISM: Building People into the Formula for Company Success.

Part II: An Ailing Capitalism – the Great Economic Disconnect: The increasing Pain of the average Worker and what the Occupy Movement is telling us about Capitalism, which some critics want to destroy – the subject of this post.

Part III: Toward a Full HUMAN CAPITALISM: the Role of Forward-thinking CEOs in fixing Capitalism and completing its transition to HUMAN CAPITALISM – which will be posted soon.

In this blog post, we address the second part: An Ailing Capitalism and The Great Economic Disconnect.

William Ayers, speaking a few days ago to a gathering of people in the Occupy Movement, said “I get up every morning thinking … today I’m gonna end Capitalism.” Read more. There has always been a fringe part of society that believes that Socialism or Communism, or even anarchy is better than Capitalism, and would end the supposed pain caused by Capitalism, but it’s more prevalent now than it has been in many decades.

Why? Consider what the average worker has endured over the past few decades:

A “Perfect Storm” of Pain for the Average Worker

Kalle Lasn, founder of a Canadian anti-consumerist magazine, is credited with sparking the Occupy Wall Street (OWS) movement in 2011 to protest the disproportionate power of the corporate elite. Later he predicted “the killing of Capitalism”.

Average workers have increasingly suffered especially from two trends which seem unfair to them:

The “Financialization” of Business: In the 1990’s, the financial side of business became the single focus of shareholders and senior executives. This led to restructuring and massive layoffs – all benefiting the shareholder and senior executives. The equation seems simple: fewer employees mean lower costs which mean higher profits. Lower morale and unemployment, however, is another result, and often lower revenues. Yet employees with “pink slips” are left wondering: “Why did they need to let me go? Just to raise the stock price a bit for investors? That seems unfair.”

“Unfair” senior executive compensation, aided by government policies (called Crony Capitalism). Some senior executives and some companies emerge from the financial melt-down fine while the average employee suffers. The ratio of senior executive pay to lower level pay spirals from 24 in 1965 to 194 in 2005. Even Fortune asks in a 2003 cover story article, “Have They No Shame?”

(Click on the chart to see a larger version.)

Additional painful, seemingly unfair forces include:

1. Globalization and Outsourcing – leading to downward pressure on hourly wages, including whole professional fields being decimated in this country to take advantage of cheaper wages abroad.

2. Tax Policy favoring the Investor vs. the Employee – (at least in terms of taxes on capital gains vs. wages). Warren Buffet decries the fact that his secretary pays a higher tax rate than he does.

3. Some Companies paying little or no Taxes – primarily because of a highly complicated tax code which, though originally set up to encourage certain behavior, ends up rewarding companies, while most individuals enjoy no such tax benefits

4. Unprecedentedly high Unemployment – and high long-term unemployment especially for youth and minorities, even while company profits seem healthy.

5. High Debt – individual and government (which will become even more onerous as we experience the inevitable rise in interest rates). A sizable percentage are “under water” – owing more on their homes than they are worth.

6. The Destruction of Wealth – many people have seen their wealth diminished by falling home prices, lack of income, falling values of stock portfolios – from before the economic downturn.

No wonder that people are hurting and angry – and that they are listening to people like William Ayers and Kelly Lasn, calling for the end of Capitalism.

If these pains are not addressed, people may grow increasingly negative toward the economic system that they believe caused these ills. What then can be done to fix these ills (and Capitalism itself), and who should do it? That’s exactly the subject of the third and last part of this series on Human Capitalism. Stay tuned.

I welcome your comments on this post.

——————————————————————–

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.

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?

The piece is broken into three parts, which will be posted sequentially:

Part I: The Emergence of HUMAN CAPITALISM: Building People into the Formula for Company Success

Part II: The Great Economic Disconnect: The increasing Pain of the average Worker and what the Occupy Movement is telling us about Capitalism

Part III: Toward a Full HUMAN CAPITALISM: the Role of Forward-thinking CEOs in completing the transition to HUMAN CAPITALISM

In this blog post, we’ll address the first part: The Emergence of HUMAN CAPITALISM:

Traditional Capitalism believed that (financial) capital was the driver of wealth creation (and, hence, the providers of that capital owned the business). Marxism, by contrast, preached that all value of a product came from the labor used to make it – and thus that workers (through the state) should own and run businesses.

Despite the financial foundation of Capitalism, the last 50 years have seen huge leaps in understanding in the U.S. that the human component is indeed the main driver of business success and of wealth creation. These leaps include:

Gary Becker, a Chicago Business School Nobel economist, wrote about the then revolutionary concept of Human Capital in his 1964 book;

Milton Freidman, another U. of Chicago Nobel economist declared in his 1981 book Free to Choose that the return on human capital had risen so that it exceeded the return on physical capital.

Peter Senge in his 1990 book The Fifth Discipline described the human component as a “learning organization” – rather than people being merely “cogs” in a machine.

In a 1994 Fortune cover story, Thomas Stewart introduced the concept of Intellectual Capital, later publishing a book by the same name.

Stanford Professor Jeffrey Pfeffer wrote in his 1998 book The HUMAN EQUATION, “Companies that manage people right will outperform companies that don’t by 30% to 40%.”

In the early 2000’s, the concept of Spiritual Capital was introduced – by Robert Fogel, another Chicago Nobel Economist (in The Fourth Great Awakening and the Future of Egalitarianism 2000), and in several of my own writings – including a 1999 article “Bringing a Company Back to Life: The Role of the CEO” and the 2008 book Noble Enterprise: The Commonsense Guide for Uplifting People and Profits.

Meanwhile, leading CEOs showed an understanding of the human dimension – and began managing accordingly. A few examples illustrate this awakening:

Henry Ford paid above the going wage so his workers could afford to buy a Ford, and to keep turnover low;

In the mid 1990’s, Jack Welch of GE declared, “We are trying to differentiate GE competitively by raising as much intellectual and creative capital from our work force as we possibly can. That is a lot tougher than raising financial capital, which a strong company can find in any market in the world.”

A few years later, Herb Kelleher of Southwest Airlines said, “I’ve tried to create a culture of caring for people in the totality of their lives, not just at work….The intangibles are more important than the tangibles. Someone can go out and buy airplanes from Boeing and ticket counters, but they can’t buy our culture, our esprit de corps.”

Chip Conley of Joie de Vivre Hospitality took Maslow’s great teachings, simplified them (thereby making them more powerful) and put them to work in his company. Conley distinguished between motivation that is just about having a “job”, motivation that is about “career” and career advancement, and third, motivation that is about a “calling” in serving a higher purpose than material gain and self. His 2007 book PEAK: How Great Companies Get their Mojo from Maslow describes his interpretation and application of Maslow, and how he used it to build a successful company.

Thus competitive advantage, which used to be built entirely on material dimensions, like a low cost supply of raw materials, or low conversion costs, or production economies of scale, or an efficient distribution system, began shifting to the people (and culture) dimensions of the firm. Leading CEOs saw that and focused on raising and employing the best human capital they could.

But that’s only half the story of HUMAN CAPITALISM. The other, painful half, we’ll explore in the next blog post.

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

Key #1: Working Hard

Sounds simple, doesn’t it? But how many people and businesses just don’t do this. They are lazy, or don’t dot the i’s and cross the t’s, or don’t go the extra mile.

What does “working hard” mean in everyday work? Here are some things people or businesses that work hard do:

1. They are physically fit and active – so they have the energy to work hard
2. They get excited about the challenge of business and throw themselves into it “whole hog”
3. They get tremendous satisfaction from doing not just a “good job” but an excellent one
4. They don’t cut corners, but rather do a thorough job
5. They marshal their time effectively, and don’t have “down time” – they’re always working on something important.

There was a time when working hard was enough to get ahead, especially if you worked harder than the competition. But now that’s no longer enough. Since we arrived in the Information Age, there’s more we need to be excellent at – but while still working hard.

Key #2: Working Smarter

In the latter part of the 20th Century, the business world discovered the power of the Mind. Concepts such as the Learning Organization (Senge: The Fifth Discipline) and Intellectual Capital (Thomas Stewart) showed that corporate success was all about mining the power of Mind. We observed that those who expanded the Mind and used it well were the ones succeeding.

Jack Welch, then CEO of GE, said, “We are trying to differentiate GE competitively by raising as much intellectual and creative capital from our work force as we possibly can. That is a lot tougher than raising financial capital, which a strong company can find in any market in the world.”

So therefore, to succeed it’s imperative to Work Smarter, but what does that mean? Here are some steps for doing that.

1. Relish learning – new things in your field or industry, but also learning outside your field. Why? Because by expanding your mind, you may well see new ways of succeeding.
2. Stand back from the things you do – and ask yourself (and others), How can we do that better?
3. Get training (and arrange for your people to get training) to improve their skills.
4. Periodically, set out to improve a process that you do repetitively. That’s to break through the natural bonds of tradition and uniformity.
5. Take on a completely different responsibility, just so you learn it. Similarly, rotate your people through different functions, so they learn more about the various aspects of the company.

Working Smarter, along with Working Hard, is key to success. But we’re finding increasingly that they are not enough. One more ingredient is needed now for uncommon success.

Key #3: Working Nobly

The first two keys could be said to be about the Human Doer and the Human Thinker. This third key is about the Human Being. Key #2 taps Mind power. Key #3 taps Heart power, which means who we are, and how we relate to others. Whereas Key #2 concentrates on building and utilizing Intellectual Capital, Key #3 focuses on building and utilizing Spiritual Capital, the human spirit that is so often underutilized in companies.

Here’s how one highly successful CEO, Herb Kelleher (of Southwest Airlines) put it: “I’ve tried to create a culture of caring for people in the totality of their lives, not just at work. There’s no magic formula. It’s like building a giant mosaic – It takes thousands of little pieces….The intangibles are more important than the tangibles. Someone can go out and buy airplanes from Boeing and ticket counters, but they can’t buy our culture, our esprit de corps.”

It’s about the company being a collection of human energies, about the quality as well as quantity of those energies, and how they flow through people to create value. Since that draws on Heart energy, it’s about purpose, joy, connection and caring.

In my book NOBLE ENTERPRISE: The Commonsense Guide to Uplifting People and Profits, I write about nobility and identify five pillars that are built into a noble enterprise that help it succeed. These are:

1. Greater Purpose
2. Ethical Values
3. Human Growth
4. Freedom within Structure
5. Unity Mindset

If you can build these five “pillars” into your own work and into your company (while still also building keys number 1 and 2), you’ll succeed far beyond the norm, and may well become the leader in the field/industry.

Introducing the Noble Enterprise Pathway (NEP) Program to Success

To help you and your organization build and utilize these five pillars, so that you can strengthen your competitive advantage, I developed the NEP program, consisting of several working sessions for groups of employees. It’s based on the successful seminar we have led for several years at the Olin Business School’s Executive Program at Washington U in St Louis.

For information go to the website, and/or contact me directly.

The search has led over the years through a lot of methodologies, some of which are still being used (Six Sigma on the quality side, for example). Many others peaked, then fell off – either because they were supplanted by other methodologies or because they became embedded into the company processes, or because management just lost interest and focused instead on some other dimension of company performance.

Something that all these methodologies have in common is that they each represent only one piece of the spectrum of needed improvement methodologies. That being so, how does management decide which to focus on?

Over the years I have worked in many of the areas that managements have focused on. Now, with a colleague who has complimentary skills and experience, we are offering services to companies that want to create Sustainable Peak Company performance. Our goal is to help management decide where to focus and then to provide the resources and expertise needed to make progress on many of the strategic drivers of superior performance.

Here’s where you can go to learn more about our new collaboration and the services we provide:

• About my new partner, Dana Saltern

• About her company BusinessOne Corp of Canada

• Press release announcing our collaboration – November 11, 2011 – Maine and Canadian Consulting Firms Join to Enhance Corporate Performance

• About our services

• List of services

We are also designing a program to help senior management executives work on seven strategic drivers of sustainable peak performance. It will be custom designed for each client and will consist of a series of working sessions, each devoted to one of the seven strategic drivers, It will be available remotely via Internet and teleseminar. If you’d like to learn more about that, please let us know.

If you would like to learn more about the Program for Sustainable Peak Performance for your company, please add a comment below or email us.

Sign in a restaurant in Connecticut

But don’t forget another constituency that is fast becoming a company’s most important constituency to serve, because of its power to help a company to grow profitably!

We visited my wife’s nearly-99 year old mother this week, and went out for lunch at a local restaurant. Those were the words on a special announcement at our table. I read it and thought, that’s great – they have made it to the tenth anniversary. That’s a notable accomplishment in the restaurant industry. And how nice to thank their customers.

That was several days ago, and the sign still rattles around in my brain. In fact, it haunts me. Why? Because they’ve mentioned only part of the formula for success!

So, let me ask you:

Whom does your business serve?

That sounds easy: We serve our customers, for without them, there is no business. That’s been the mantra for years. But is that really the whole answer?

The financial folks started a push a few decades ago to refine our thinking so that we kept the shareholder in mind – in fact, first in mind. That’s behind most of Wall Street’s moves to restructure companies so they provide a greater financial return to financial shareholders, and thus greater shareholder value in the price of the company’s stock.

Okay, so there’s both the shareholder and the customer that we serve. But there’s another constituency we serve. And it often gets forgotten or overlooked. That is our employees. Funny how many annual reports say that “our employees are our most important asset.” Yet those same companies too often forget that humans are not just a resource; they’re a constituency that we serve.

Perhaps it is best said by David Neeleman, founder and head of three successful airlines, the most recent being JetBlue. At a meeting I attended some years ago, Neeleman explained his people-centered philosophy of leadership. During the Q & A, someone asked, “That’s all well and good, but how do you explain that to the financial shareholders whom you serve?” I still remember his quick, curt response so vividly. Without even stopping to think, he spoke these words about the way he saw the profit equation and management’s role in it:

“We serve our employees, who serve our customers, who serve our shareholders.”

Boom. End of story. How clearly that statement rings!

So, back to the restaurant, just think how powerful it would have been for them to state:

Thank you to our loyal customers and dedicated staff, for without them, we would not be the restaurant that we are today.

The best way to drive home this truth may be to tell you about companies that I know that purposely and consciously “serve” their employees. Here are two:

Prosperity Candle – whose motto is “empowering women globally”
http://www.prosperitycandle.com/.

Amber Chand, co-founder of Prosperity Candle, created a mission of helping women in war-torn areas to create a livelihood for themselves and their families. They train the women and support their becoming entrepreneurs. It’s not a government or non-profit program requiring outside funding. It’s funded by (mostly) American consumers who buy their products.

A more in-depth discussion with Amber is provided in our Newsletter from Summer 2009.

Nick’s Pizza & Pub – http://www.nickspizzapub.com/home/

Nick Sarillo wanted to create the best pizza restaurant in the industry – and to do that, he didn’t work on developing the best recipe. He already knew how to make pizza – his father had a pizza restaurant. He focused on people – both customers and employees. I won’t go into his employee practices here, but just consider the results: a profit margin historically well above the industry average, with employee turnover a fraction of the industry average.

A more in-depth description of Nick’s is provided in an earlier blog post.

These are just two companies that treat the people who work in/for their companies as not only “valuable resources” but as constituencies that must be served if the business is to thrive. I plan to include them in my forthcoming book as examples of a “new business model” that I see emerging.

So now go back to my original question, and answer for yourself
* Whom does your business serve?
* And furthermore, what might you do so that/those constituency(ies) feel(s) well served?
* And, regarding the employee dimension of your company, what might you do to inspire and motivate them to help take your business to new levels of growth, innovation and profitably?

Transformed businesses focus energies not just on the outer dimensions mentioned in our prior blog post. They also focus on such inner issues/questions as:

1. WHY we are in business – what difference are we trying to make, especially in customers’ lives, but also in our employees’ lives, in our communities, in our industry, and even in the world.

   This not only makes us more likely to strike a positive chord with customers, but also with employees, as well as others in anyway connected to the business.

2. PEOPLE and RELATIONSHIPS – to be more mindful of people and not treat them as cogs in the proverbial machine.

   This is about strengthening relationships – empowering and inspiring people, not just guiding them or controlling them.

3. HOW we operate – in terms of the VALUES we work from.

   Most of the time we think of “how” in terms of processes, i.e., the actions we take, but an equally important “how” is about the kinds of energy we bring to our work, expressed for example through the values we hold.

Creating a Management System that can lead both the Outer and Inner dimensions

Existing management systems are rooted in an older mindset, and so are usually heavy on micro-managing people, controlling people and overemphasizing the outer measures of performance (revenues, production, efficiency, (current) profits). What’s needed for a company that embraces the new mindset are such things as:

1. Measures of the Inner dimensions, such as employee morale and customer satisfaction.
2. Finding opportunities to live and express our Purpose and Values more powerfully and profitably.
3. Getting people throughout the organization looking at the whole rather than getting trapped in the details and pieces – and finding ways to make the whole more successful, not just the parts.
4. Getting people (especially management) working collaboratively, versus in competition with each other.

When the two mindsets (the “outer” that emphasizes the financial and physical dimension and the “inner” one that emphasizes the human energy dimension) are in opposition, what then, you ask, should you do? First that conflict should give you a clue that the old, traditional way is not necessarily the way to go. I would suggest that you take the long view: What will be best for your company in the long run? This includes determining which pathway will strengthen your organization – the motivation and commitment levels of employees, and also strengthen relationships within your organization. It also means looking at the impact of the action being considered on customer loyalty.

All these latter measures are like “money in the bank” for you that you can draw on. An example that comes to mind is when Chip Conley’s Joie de Vivre hospitality company was experiencing a decline in customer visits after 9/11/2001, he wrote to loyal customers and asked them to consider making more of their stays with Joie de Vivre. He knew that customer goodwill was high, and that then was precisely the time to “draw” on it. The resulting increase in customer demand helped breathe new life into the company and its financial performance, getting it through a difficult economic time period.

Thus, in addition to spending energy on the traditional approaches to making companies more successful that we identified in the prior blog post, if you truly want to transform your company into a high performing business, make sure you devote time to addressing the inner dimensions of your company discussed above.

I welcome your comments on these ideas – with questions, additional insights, and even examples. Your insights will be helpful as I develop my next book about this subject.

Okay, so you don’t like the suggestion that you and/or your business needs to be transformed. Nobody likes to be accused of being unreformed or untransformed, but frankly, I couldn’t think of a better phrase. Maybe you’d like something more “corporate speak” like “the emerging business model”. In any case, I am continually bombarded with literature about ways of making business more successful, and I invariably find them missing an important ingredient.

That missing ingredient some might call the “soft” side of business (and I hope you’re still with me despite my using that word) or what I see as the “inner” dimension or “human energy dimension” of business. Research shows that many companies have workforces working at a small fraction of their potential output. This suggests we ought to be figuring out how to motivate, energize and inspire people. That’s the hidden gold mine of business effectiveness.

Current efforts on the outer dimensions of business effectiveness include,
* finding lower priced sources of needed materials and services
* developing more efficient business processes
* developing more effective resource planning and management systems
* utilizing technology more powerfully, not just in the design of our product or service, but in our marketing and management systems.

Experts abound in each of these areas, and they often specialize in a piece of the area I mentioned. Improvements in these areas will certainly help most any company achieve better performance. It used to be that a company could count on being the industry leader by doing this, but now it’s no longer enough. More is needed, but where to look for further improvements?

The Growing Importance of the Inner sources of improved business performance

One of the ways business has changed over the past few decades is that:

• people have become more important to business success – hence the emergence of concepts like Human Capital (1960’s), team building (1970’s), the learning organization (1980’s), Intellectual Capital (1990’s), and other people-oriented business concepts
• and in the last few decades, people have become more concerned about
  • their own purpose and thus the meaningful work
  • ethics and doing what’s right
  • relationships

These changes have not erased an older mindset that

• Puts money above people, as Capital is viewed as not only an asset, but also the driver of the wealth creation process, whereas people are merely cogs in a machine, and treated financially as merely an expense.
• Views people as merely motivated by money.
• View management’s role as not only to set strategy and make important decisions but also to control people and their behavior.

So the changes in mindset are happening with some people in business, but not in others (at least not yet). I would argue that those who are making this change in mindset are having an easier time succeeding personally and with their businesses. A book I’m currently working on will provide examples of such leaders and their businesses. (For an advanced look at those examples, I suggest you look at past editions of our management newsletter, Leading in a New Light, earlier posts in this Notes on Noble Business blog, and the example of a dramatic corporate turnaround in the book Noble Enterprise.)

In the next blog post, I’ll share some ideas of how innovative leaders are transforming their businesses.

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.