Company Purpose and Shareholder Value

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What is the purpose of a company?  It's one of those questions that has been debated since the beginning of the industrial revolution.  So, is it related to shareholders?  Customers?  Employees?

While presenting at a conference a few years ago, I surveyed those in attendance to discover what they felt the purpose was for the companies for which they worked.  77% of the people who responded (243 of 315) chose money as the reason their companies existed (e.g., earnings, shareholder value, etc.).

The results were not really surprising since the financial side of the business often receives the most attention by senior leaders.  Also, the actions taken in response to a decline in earnings tend to affect a greater number of employees than when the other parts of the business suffer.

Why it Matters

A company's purpose drives its business strategies, including direction, investment related to products and services, marketing, people development, and processes.  On the highest level, the purpose drives the decisions regarding whether the company will compete on the basis of innovation, low costs, or product and service features.

A clear purpose also helps to motivate people by giving meaning to the work they do and build teamwork by providing a common focus.  Without clarity, people will define the purpose in their own terms, resulting in internal battles and a breakdown in teamwork because of conflicting ideas regarding what the company is trying to achieve.

Is it Money?

Those who have read my book or other posts on this blog know that I believe a company's purpose should be focused on serving a need in society (in other words, providing something that potential customers value).  Although it is important for any company to be financially successful, this is the effect - not the cause - of serving customers well.

For example, suppose a privately-held manufacturer of relief valves defines its purpose as, to help protect homes and lives by providing high-quality and reliable temperature & pressure relief protection.  Further, suppose that the company's focus on offering highly reliable, easy-to-install valves at a reasonable price lead to dramatic success and growth.  To grow further, though, the decision is made to take the company public.

Now that it has become a publicly traded company, does it make sense for management to change its purpose from protecting homes and lives to increasing shareholder value?  In other words, should the focus now shift from customers to shareholders?  Obviously not, but this is, in effect, what many companies have done over the years.

What Others Have Said

Peter Drucker wrote that the purpose of a business is to create a customer.  In his book, The Practice of Management, Drucker wrote, "the profit motive and its offspring, maximization of profits, are just as irrelevant to the function of a business, the purpose of a business, and the job of managing.  In fact, the concept is worse than irrelevant.  It does harm.  It is the major cause for the misunderstanding of the nature of profit in our society and for the deep-seated hostility to profit which are among the most dangerous diseases of an industrial society."

Many people may be surprised to learn that, during a March 2009 interview with the Financial Times, Jack Welch [link] referred to focusing on shareholder value as a dumb idea.  Often considered as the creator of the shareholder value movement in business (a fact disputed by Welch), he added that, "shareholder value is a result, not a strategy," and that the main focus should be on employees, customers, and products.

Serve First, Collect Later

The point of all this is to emphasize the importance of developing (and sticking with) a clear purpose - and that it is not related to making money.  Focusing on financial gain leads to short-term decisions and cost cutting that, although well-intended, tend to damage the organization's future.  A focus on shareholder value may lead to satisfied stockholders (at least in the short-term), but dissatisfied customers and employees.  A focus on the customer, on the other hand, can lead to happy customers, employees, and shareholders.

Fast and Flexible

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As we climb out of the worst economic downturn since the Great Depression, it's looking like success will come to those companies that are more flexible and can adapt to change more quickly than competitors.  Although this has always been a competitive advantage for companies, it is quickly becoming a necessity for survival in the years ahead.

The problem this poses for many organizations is related to the fact that, as a company grows it tends to become slower and more resistant to change.  With growth comes more people, more formalized policies and systems, and additional layers of management that all contribute to a slowdown in decision-making and interfere with the ability to do much of anything quickly.

Begin by Recognizing the Need

The problem for many companies is that they don't realize how slow they've become or that the lack of speed is affecting the ability to compete.  Listed below are a number of activities where moving quicker can greatly improve competitiveness.  When looking at these activities from strictly a financial perspective, it becomes clear that they actually cost the company when not addressed.  Once an investment is made in a particular process - whether related to new product development, manufacturing, etc. - the company loses money everyday that the investment does not produce income.

• New product development
• Shipping products to customers
• Building construction
• Servicing customers
• Integrating an acquisition
• Expansion into new markets
• Implementing a new ERP system

It is important to keep in mind that success in business requires more than speed.  Quality of product or service must be continually improved along with improving cycle times. There are very few markets where customers will accept substandard quality even when the product or service is delivered quickly.

How?

In order to become more flexible and adaptive, companies must study their processes, systems, and cultures continually to identify where the delays and breakdowns occur.

On the process side of the equation, reducing cycle time requires mapping the value stream and identifying where the delays, breakdowns, and quality problems occur.  This assumes, of course, that there is, in fact, a standard process.  It is not uncommon for companies to have a variety of ways to perform similar tasks.  Sometimes referred to as the "it depends" rule, improving the process first requires defining a standard approach for how the work is to be done - and making sure everyone follows the standard - before attempting to make improvements.

Working on the process issues to reduce cycle time tends to be the easy part of improvement.  The culture must also be addressed to determine how open people are to changing processes, how effective communication is within the company, and basically why people do the things they do.

Removing the barriers that interfere with a company's ability to react quickly to changing market conditions will create a more flexible and adaptive - and profitable - company.  The key is to keep speed and flexibility in the forefront of people's minds until it makes its way into the company's operating philosophy.

Success in this endeavor can put you in an elite group of companies that manage to remain fast and flexible regardless of how large they become.

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France Telecom & Employee Motivation

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France Telecom announced last week that it plans to begin basing up to 30% of a manager's bonus on social criteria, including job satisfaction of the people on the manager's team.  The change was implemented as part of a plan to address the company's rash of suicides over the last two years. [story]

Many of the people at the company who committed or attempted to commit suicide blamed their actions on working conditions, forced transfers, or fear of job loss.  In response to the problem, France Telecom's leaders have implemented training programs for managers and supervisors, and hired additional physicians, psychologists, and human relations personnel. Last week's decision to tie bonuses to worker satisfaction, absenteeism, and other people-oriented measures was the latest effort to deal with the problem.

Why Wait for Suicides?

My initial thought about this latest action was that it was a good move to improve the environment and working conditions at the company.  In addition to stopping the suicides, it can result in improving productivity and quality of service.

Upon further consideration, however, I wonder why it would take a rash of suicides for a company to understand the need to hold managers accountable for the satisfaction of those who report to them.

It is the responsibility of anyone in a supervisory position to create a positive environment for those on his or her team.  This includes coaching, motivating, and developing people, as well as creating an atmosphere that continually challenges people to improve.  A good leader also has to truly like people.  Although liking people does not necessarily make someone a good leader, disliking people definitely makes for a bad one.

Also, senior leaders must accept the responsibility to promote and hire only people with leadership capabilities into management positions, and commit to regularly develop the abilities of these people to become better leaders.

Remember Maslow?

Those who learned in management classes about Abraham Maslow's theory of motivation will undoubtedly remember his hierarchy of needs.  In his book, Motivation and Personality (HarperCollins, 2006),  Maslow theorized that people have five levels of needs, ranging from the most basic (physiological, safety, and love/belongingness) to the highest (self-esteem and self-actualization).  Maslow further stated that people cannot be motivated by appealing to higher level needs when they feel their basic needs are not consistently met.

When applied to the workplace, it becomes clear that fear and other aspects of poor leadership keep people at lower levels - specifically, the need for safety and security.  Change, innovation, and improving productivity, on the other hand, require people to be at higher levels.  In other words, we will never achieve the type of environment that fosters quality, improvement, and dedication necessary for long-term success and growth without helping team members satisfy their lower level needs.

Unfortunately, France Telecom is learning this the hard way.  Other companies can learn from their misfortune and create the type of environment that values employees.   The results of such an effort will be rewarding, not only for workers, but for all stakeholders.

Is Change Management the Missing Link?

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I recently had lunch with a financial executive who expressed frustration with his company's lack of success with strategic initiatives.  He told me that the initiatives tended to evolve from high expectations to disappointment to - in the most drastic instances, being abandoned altogether.

Among the initiatives he mentioned that had disappointing results over the last couple of years included projects related to reducing the product development cycle time, implementing lean manufacturing, and upgrading the company's ERP system.

It was very clear that the company's lack of success was not due to a lack of desire or interest.   The management team spends a significant amount of time each year developing the strategic plan and creating initiatives to improve competitiveness.  A manager or director is always assigned the responsibility to lead projects and a fairly detailed plan is developed for each initiative.

So What's the Problem?

The inability to successfully complete high-level initiatives is a fairly common problem for companies.  Like many organizations, this company tended to approach strategic initiatives from a purely technical perspective, while ignoring the behavioral factors involved in change.

For most organizations, strategic initiatives involve a significant level of change.  Whether it is a change in behavior or method of operation, success requires respecting and validating the human complexities involved, no matter how insignificant the change appears to be on the surface.

There are barriers to change in virtually every organization that interfere with successful completion of initiatives.  These barriers can be personal (related to an individual's personal fear of change), political (resulting from the interactions and culture of the organization), or organizational (caused by policies and systems within the company).  Recognizing the existence and extent of the barriers can greatly improve the chances to succeed with the desired change.

Planning for Change

It is important to include steps to address the barriers as part of the planning process for change initiatives.  For example, if there is fear within the organization, steps must be taken to identify the causes and actions to reduce its effect on the initiative.  The types of fear often associated with change include fear of job loss, fear of appearing ignorant for asking questions about the change, fear of retaliation for questioning the approach being taken, and others.  Although it is virtually impossible to completely eliminate fear within any organization, it is important to understand where it can interfere with the change and minimize it as much as possible.

An Example

A global company with factories in several countries around the world created an initiative to implement a best practices process throughout the organization.  The initiative included a kick-off meeting attended by the company's plant managers where the process was introduced and expectations communicated.  Throughout the following year, though, very little sharing was done between plants and everyone pretty much operated as they had before the initiative was announced.

When I was called in to help with the initiative, I began with a series of interviews to identify barriers that existed within the company that could interfere with the sharing and adoption of best practices.  From the interviews, it became clear that despite the importance surrounding the initiative, the company's culture actually discouraged sharing of information and accepting suggestions from people at other plants.  The plant managers had been in their positions for many years and were regularly rewarded by acting independently.  Many were selected for the position because of their strong, independent personalities, and had always been expected by senior leaders to be experts on pretty much everything related to the factories they led.

It quickly became obvious that the plant managers did not accept input from each other because of the fear of appearing less knowledgeable than one or more of their peers.  Also, since the company's culture was highly competitive, people did not want to share information that would help improve another plant's results.

Resolving this problem required modifying the behavior of the senior leaders, coaching the plant managers, and changing the company's systems of measurements and rewards.  It required a lot of effort and consistency at the senior level but eventually the initiative began to visibly progress and result in significant productivity improvement across the company.

In the above example, the process for sharing best practices and visible commitment from the top was excellent.  All that was missing was a change management approach to the initiative.  Once the barriers to change were identified and addressed, implementing the process became much easier.

Whether a company is implementing a best practices process, pursuing lean, or integrating an acquisition, it is vital that a change management approach is used to make sure the people issues (i.e., the barriers to change) are adequately addressed.

Change as a Competitive Weapon

As we slowly emerge from the worst economic period since the Great Depression, those companies that are able to adapt quickly to changing market conditions will be the most successful.  Organizations cannot afford to waste time with initiatives that move too slowly or fail to achieve desired results.  Making the effort to identify and remove the barriers to change within the company will greatly improve the level of success with initiatives while simultaneously creating more a flexible, adaptive, and profitable company.

The Future of Television

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Earlier this month, a number of viewers in the northeast missed the first 15 minutes of the Academy Awards broadcast because of a dispute between Disney and Cablevision Systems.  The contract between the two had expired and, as the negotiation process got ugly, Disney pulled its signal from the system.  After issuing statements characterizing the other party as greedy and not caring about its customers, both sides finally came to an agreement that allowed the signal to be returned just after the Oscars began.

This was the second high profile dispute between a television broadcaster and a cable provider.  Fox and Time Warner had a similar battle late last year regarding the price of News Corp channels included in Time Warner subscriptions.  From all indications, this is just the beginning as broadcasters watch revenue from advertisers shrink and look for ways to make up for the loss.

Is the Business Model Obsolete?

As tensions between the broadcasters and subscription providers grows, I can't help but think that the current model for the industry is quickly becoming obsolete.  Broadcasters want more money for programming - subscription providers want more money for delivery of the programming - consumers want access to entertainment without paying more for their subscriptions.  Something has got to give . . .

I'm definitely not a media visionary, but I'm guessing that, now that internet bandwidths are increasing, it won't be long before we start downloading our television programs from the internet and sending them to our televisions wirelessly.  Although it's possible that we'll continue to pay companies like Comcast for subscription packages, it's also possible that we could end up paying the broadcasters directly through a monthly subscription or individually by the download.

The next five years will be very interesting to watch as another industry's business model becomes profoundly altered by the internet and the innovative and flexible companies take advantage of the opportunity to grow while those that don't significantly shrink or completely disappear.

Union vs Management: Who's At Fault?

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According to a story in Friday's Wall Street Journal, the airline industry is beginning to face another challenge to their survival.  After years of concessions, union members are demanding wage and benefit increases which, according to airline executives, are going to seriously damage their ability to recover.

Same Old Story

Here we go again . . . union and management, each charging the other with being greedy and self-centered.  We've seen it again and again and will unfortunately continue to see it in the future.

So which side is at fault in this situation?  Who is driving down the organization's competitiveness by ignoring the other group's needs.  In my opinion . . . it's both.

I'm not close enough to the airline negotiations to talk about their situation directly, so I'm going to approach the issue in a much more general sense.  I have been intimately involved with several companies throughout my career that were unionized and, on one occasion, led a company where all but a very few of the workers belonged to a union.

In most cases, I have noticed that people on each side tend to approach negotiations with the objective of getting as much as they can rather than working toward an agreement that benefits both parties - in other words, the company as a whole.  Throughout the process, each side tries to win while the other loses.  Whatever happens in the negotiations, when the company doesn't win; everyone ends up losing.

It Doesn't Have to Be This Way

There are companies that resolved this issue and, as a result, have been very successful.  After all, one of the most basic premises in business is the idea that an organization can only succeed over the long-term if everyone is focused on the same objectives.  When one group is focused on its own interests, the other tends to follow suit and the company is never truly successful.

Whenever I worked in a unionized company, I spent a great deal of time on the relationship between union members and white collar workers.  When I led an organization that was  unionized, I invited a union representative to participate in strategic planning meetings because I felt that the person could play a big part in getting workers on-board with specific initiatives.

The benefits of including the union in the strategic planning process were huge.  Besides the success achieved with initiatives that directly involved unionized workers, people felt that their opinions were respected and valued by the management team.  Trust also increased because of the openness that was demonstrated by letting a union representative hear - and actively participate in - the high-level planning sessions.

It Can Work If You Want It To

To get to the point where the union vs. management situation becomes a thing of the past requires a lot of effort on both sides.  It is critical that managers start making the union feel like a partner in the company, and for both sides to focus on what is best in the long run for the company as a whole.  The chance for success diminishes greatly, though, if one or both groups does not truly want to improve the relationship.  One act of distrust can quickly wipe out years of work to build the relationship.

With many years of concerted effort, however, it is possible to build up trust to the point where one company, instead of two sides, exists.  And when the company reaches this point, great things will start to happen.

Berkshire's Future Management Tool?

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Projected Successor to Buffet Uses Termination List to Motivate

Every year, speculation increases as to who will one day succeed Warren Buffet as CEO of Berkshire Hathaway.  According to an article in the February 27th issue of the Wall Street Journal, the most likely heir apparent at present is David Sokol, chairman of MidAmerican Energy Holdings Company and chairman/CEO of NetJets, Inc. (both are units of Berkshire Hathaway).

Mr. Sokol's record at MidAmerican has been impressive.  He took over the company in 1993 and, since Berkshire Hathaway began investing in the company in 2000, earnings have increased from roughly $109 million to $1.7 billion.  Results like this, along with Sokol's reputation as a deal-maker, and his close relationship with Buffet have increased the speculation that he will be the next Berkshire Hathaway CEO.

Many people wonder how the company will change when someone other than Buffet is in charge.  The fact that he ahs been running Berkshire Hathaway since the mid-1960s and has built it from a small, unknown textile manufacturer to the 18th largest company in the world with 250,000+ employees makes discussion and debate about its future very interesting.

Leading Via a Termination List

With Sokol, we do get a glimpse into his leadership style through the book, Pleased But Not Satisfied, that he authored in 2007.  The book presents his philosophy on a variety of business issues, including leadership.  On the topic of managing people, he wrote that he maintains a notebook of the successes and failures of each person on his team.  He uses the information to evaluate and rank each person in terms of whom he would terminate at any given time.

Although I've seen a number of different approaches to leadership over the years, I've never seen one that makes use of a termination list.  In previous blog posts, I've written about the importance of being people-oriented when leading a company.  I believe that an often forgotten responsibility of a CEO is to continually motivate, develop, and focus the efforts of people.  If the leader is not fundamentally people-oriented, attempts to create the type of culture that motivates and unleashes the potential of team members will be a constant struggle.

Keeping a list of successes and failures for coaching purposes is potentially an effective way to develop people.  Ranking people, based on the list, in order of expendability turns the list from a development tool into management by fear.

I'm sure that Mr. Sokol has some very talented people on his team.  I can't help but think, though, that the fear created by the termination list results in burying some of the talent and motivation, discourages people from taking chances or setting aggressive goals for fear of failure, and has resulted in the loss of some potentially excellent workers.

In some way, the results Sokol has achieved at MidAmerican makes it difficult to argue with his approach.  I believe a more open, servant leadership style, however, would lead to even greater results because when people are relaxed and secure in their positions, they are more innovative, less competitive with each other, and willing to strive for the impossible.

The Draw of Berkshire

It is Warren Buffet's reputation as a leader that gives Berkshire Hathaway first shot at many acquisitions - sometimes before anyone else even knows a company is for sale.  Many companies actually approach Buffet when they are ready to sell because they feel comfortable with the way Berkshire treats companies (and the people working in them) after the acquisition.  This gives Berkshire Hathaway the ability to target strong, well-run companies, while avoiding desperate and troubled organizations.

I'm not sure a CEO with a termination list will give an acquisition by Berkshire the same level of desirability.