The Case for Employees as Stakeholders

This post is the third in a series on stakeholders’ value creation in volatile times.

As traditional and social media unfailingly reiterate, we are living in turbulent and potentially dangerous times. Traditional spheres of political and economic power are mutating rapidly. Established values are being shaken. The certainties of yesterday are falling away. Managers and employees are increasingly stressed out and disengaged.

The gap between economic winners and losers is widening. Some evidence suggests that wealth inequality measures are the greatest ever recorded. This can lead to the social and political unrest stirring in many advanced economies. (See my October 24, 2016 post, “Value Creation in Volatile Times: The Case for Ethical & Socially Responsible Companies”.)

Governments have registered only limited success in addressing these dangerous tensions. Conversely, multinational corporations with their vast resources, global footprints and market orientation are well positioned to alleviate them. While companies depend on profitability for their existence, corporations are increasingly recognizing that the interests of each stakeholder - shareholders, employees, vendors, customers, the larger community and the environment- complement synergistically the others and lead to the creation of even greater, sustainable, value. For many, this starts with their employees.

Corporate leaders often repeat: Our employees are our greatest asset! As so eloquently put in the slogan of Dofasco (part of ArcelorMittal), one of Canada’s oldest and most efficient steel makers, Steel is our product. People are our strength. Research confirms this adage by showing the link between superior human resource management and superior organizational performance. “Along with the intellectual and knowledge property they create, human capital has become the most important intangible asset most corporations possess.” (Jay A. Conger and Edward E. Lawler III, “Human Resource Management: The Role of Boards”, The Handbook of Board Governance, Wiley, 2016, p. 501)

Successful corporations hire the best talent, and devote considerable resources to retain them and keep them engaged. They invest the necessary time and effort to hire the right candidates who not only possesses all the required competencies (see my November 12, 2015 post, Great Leaders: The Competencies Imperative), but who also share their business purpose, values and culture. They stress employee empowerment and engagement. These companies - such as Starbucks, Southwest Airlines and The Container Store - are future-looking, playing the long-game. They invest in better trained and more service-oriented workforces. They promote teamwork and a team culture characterized by sharing and collaborating. A good team always produces better results than individuals working alone. Incentive programs are often team-based. Compensation policies are transparent, fair and generous; senior executives don’t earn disproportionately more than the average pay of all employees. Some provide their employees with a share of their profits (profit sharing or equity). Forward-looking companies create purposeful work environments that challenge and encourage their employees to learn and grow.

The benefits accruing from having engaged and collaborative employees as full-fledged stakeholders are evident. V. Kumar and Anita Pansari cite the following statistics in their article, “Measuring the Benefits of Employee Engagement”, (MIT Sloan Management Review, June 16th, 2015). Businesses with more engaged employees:

  • Outperform disengaged employees by over 20%
  • Have 10% - 15% higher profits versus 0% - 1% in companies with disengaged employees
  • Are 87% less likely to have employees leave the organization

We are in the midst of an historic transition where many companies are starting to recognize that the best way to create value in the long term is to integrate the interests of its multiple stakeholders in a single strategy. The most successful corporate leaders see beyond the sole imperative of quarterly profits. Forward-looking companies understand that sustainability depends on their ability to understand and accommodate the needs of all stakeholders, starting with their employees. The most successful ones (such as Tata, Google and Costco) do already …

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Value Creation in Volatile Times: The Case for Ethical & Socially Responsible Companies

This post is the second in a series on Stakeholders’ Value Creation.

Large publicly traded multinationals are considered by some to be the real centres of power of the global economy in the 21st century, where technology and innovation are integral to success (See James McRichie, The Individuals Role in Driving Corporate Governance, The Hand Book of Corporate Governance, Wiley, 2016). If true, this is both a challenge and an opportunity to shareholders’ long-term value creation.

The challenge, here, is that these corporations are so widely traded, have such vast resources and large global foot prints that they risk being more accountable to management than to shareholders. According to Robert A.G. Monks, a shareholder activist and corporate governance advisor, shareholders’ ultimate right to control corporations is “aspirational at best”. Today’s corporations, he contends, are “so widely owned and so widely traded that they have no owners” (defined by the SEC as 10% or more). Control, in such scenarios, has effectively been separated from ownership (“The Happy Myth, Sad Reality: Capitalism without Owners Will Fail”, The Hand Book of Corporate Governance). Corporate managers thus might end up being too focused on quarterly results to the detriment of considerations of the public good and long-term corporate sustainability.

Large multi-nationals, as well as large privately-held companies, naturally do gravitate to countries offering the best incentives and the lowest corporate tax rates. This, over time, could exacerbate strains between economic winners and losers. Some evidence suggests that wealth inequality measures are the widest ever recorded. (Jill Treanor, “Richest 1 Percent Own Nearly Half of Global Wealth, Says Report”, The Guardian, Oct. 14 2014). This leads to the social and political unrest stirring in many advanced economies.

Conversely, the very power of multinational corporations with their vast resources, global footprint and market orientation positions them well to alleviate these dangerous tensions. These corporations advance employment and reduce poverty through access to new markets, workforce development, product innovation and distribution. Unilever’s purpose, for example, is to make sustainable living commonplace by enhancing the livelihoods of millions of people as it grows its business. (See Unilever’s 2014 Annual Report).

Increasingly corporations are being held to account by their stakeholders - shareholders, employees, vendors, customers, the larger community and the environment. While companies depend on profitability for their existence, forward-looking corporate boards recognize that it is not sufficient in and of itself (see my September 6 2016 post, CEOs & Stakeholders’ Value Creation). The most successful boards are comprised of directors of diverse experiences, expertise, age and gender. They understand that “non-financial” environmental and social issues are risks that can over time impact corporate capital and long-term shareholder value creation. They realize that devastation created by the increasing frequency and severity of natural disasters due to climate change; scarcity of food, water and medicine; and poverty are global existential threats.

Forward-looking boards focus on generating sustainable value for all their stakeholders. They recognize that the interests of each stakeholder complement synergistically the others and lead to the creation of even greater, sustainable, value. These companies codify and publicly state their commitments to ethical, socially responsible and sustainable business practices. A number report on how they perform in the financial, social and environmental areas. There is a clear connection between such a corporate culture and profitability. Research indicates that the performance of stock prices of companies is influenced positively by clearly stated sustainability practices. (See Alice Korngold, “Board Governance for a Better World, The Hand Book of Corporate Governance).

The success of companies to resolve the highly complex and volatile challenges they are facing rests on the excellence of the CEOs, and of the boards of that hire them and provide strong oversight, strategic direction on long-term value creation and support.

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CEOs & Stakeholders' Value Creation

The primary goal of CEOs is to leave a meaningful legacy, something greater than themselves and the organizations they lead. They aspire to accomplish the extraordinary. Today’s legacies differ from yesterday’s. We are in the midst of a historic transition where old paradigms are giving way to new challenges and innovative possibilities.

Based on our experience with high performing executives and our review of the best thinking on leadership, we have determined that the most successful CEOs are purposeful leaders. They create motivated, successful organizations that work well in both human and business terms. While companies depend on sustainable profits for their very existence, these leaders recognize that they are not sufficient in and of themselves. Not all profits are equal. It matters how money is made. David Gregory Roberts, author and former heroin addict and convicted “gentleman bandit”, said it well: “If we can’t respect the way we earn it, money has no value. If we can’t use it to make life better for our families and loved ones, money has no purpose.” (Shantaram, 2004) For purposeful CEOs, leadership includes social responsibility.

As Michael Porter and Mark Kramer contend “profits involving a social purpose represent a higher form of capitalism, one that creates a positive cycle of company and community prosperity.” (“Creating Shared Value: How to Reinvent Capitalism - and Unleash a Wave of Innovation and Growth”, HBR, January-February, 2011) Great CEOs make a positive contribution to society through their organizations. These leaders are self-aware, optimistic, persistent and resilient. Their message is one of hope, respect and compassion. As a seasoned CEO and mentor once told me, “If you treat your stakeholders as children and they will act as children. But if you treat them as adults, with respect and trust, they will act as mature responsible adults.”

The most successful CEOs understand the purpose, values and culture of their organizations. They realise that business is about creating lasting value for all their stakeholders: shareholders, team members, vendors, customers, society and the environment. All are linked, interconnected. This interconnection creates a vibrant circle of harmony where each stakeholder complements synergistically the others and leads to the creation of even greater value, including higher profits.

Ah but the proof is in the pudding. Companies win in the marketplace. Respected companies such as “Southwest Airlines, Google, Costco, UPS, POSCO, Tata, The Container Store,, Whole Foods Market, Nordstrom, Patagonia, Trader Joe’s, Panera, and Bright Horizons have all shown that this way of doing business is leads to multifaceted success over time.” (John Mackay and Raj Sisodia, Conscious Capitalism, 2013)

Purposeful leadership is not for the faint of heart. It calls for great vision, courage and resolve. But the rewards are real and fulfilling. As stewards of all their stakeholders’ values, purposeful CEOs choose service over short term self-interest. They embrace the interdependencies and synergies between them. They inspire all their stakeholders to build an enterprise which is greater than its individual constituent parts. This is their legacy. By fashioning a vibrant circle of harmony between all of their stakeholders, purposeful CEOs create the extraordinary.

We will explore in subsequent posts the role of CEOs as stewards for each of their stakeholders, starting with shareholders.

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Complexity, Volatility, Purpose & Leadership

At the Bonar Institute for Purposeful Leadership, we work with executives who are dealing with the demands of increasingly complex problems in a volatile and uncertain global economy. The most recent example is the immediate and dramatic global reaction to the “Brexit” result. In the past, issues were generally more straightforward and could be solved more quickly and efficiently. Today, executives face problems that typically have no single right solution. How, for example, to respond to the ultimatum from a major client for more customized (and expensive) products at significantly reduced prices? Or, how to square increasing shareholder returns while simultaneously raising employees’ salaries? According to David Dotlich, Peter Cairo and Cade Cowan, these types of issues are paradoxes: Problems “complicated not just by a single set of contradictory forces but by many” (The Unfinished Leader, p. xi, 2014). Our focus at the Bonar Institute is to help leaders effectively manage these issues by helping them accept their inherent complexity and ambiguity, and then develop strategies to move forward.

While problem solving and flexibility remain necessary skills of a successful leader, they are not sufficient. Steven Stein and Howard Book identify in TheEQEdge (pp. 269-271, 2011), four pillars of highly successful leaders:

  1. Being centered, self-aware, straightforward and composed under stress
  2. Taking action, being decisive with follow-through on important decisions
  3. Having a participative management style, excellent listening and communication skills, focus on winning hearts and minds, accountable for their mistakes and imbued with a strong sense of social responsibility
  4. Being tough-minded, assertive, resilient and optimistic

Social responsibility is becoming increasingly important for executives and the companies that they lead.

From our experience with executives, it is their strong sense of purpose, of embracing a reality greater than themselves that brings the characteristics of successful leadership together. This creates the sharp focus that leads to effective, practical and transformational results. A leader’s “most important role is to be the steward of an organization’s purpose” (Nick Craig and Scott Snook, From Purpose to Impact. HBR, May 2014). Successful companies such as Johnson & Johnson, Royal Bank of Canada and Whole Foods identify and embrace the raison d’être of why they are in business. This is their higher purpose. It transcends the sole imperative of superior quarterly earnings. Profits are of course one of the most important drivers of business. But, they cannot be its sole purpose. A company’s higher purpose guides overarching decisions from governance and corporate structure to next generation succession planning to investments, including product development. These corporations align their purpose at the highest level with those of all their stakeholders: shareholders, employees, vendors, customers and the larger community. They devise strategies that engage stakeholders, as well as accommodate their specific behaviours, interests and needs. Business leaders “must never knowingly allow the overall enterprise to be harmed just to benefit one of its shareholders in the short term” (John Mackey and Raj Sisodia, Conscious Capitalism, 2013, p.305).

We are in the midst of an historic transition in corporate governance where the community and the environment are beginning to be seen as key stakeholders. At the Bonar Institute, we offer tailored programs to assist companies and their leaders acquire the skills and mind sets to be agents of change and responsible corporate stewards of our complex, volatile and uncertain world. The most successful companies already are …

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Risk Mitigation for Businesses in Early Stages of Development: The HR Imperative

The dynamics underlying the everyday business situations of companies in early stages of development is a particular focus of the Bonar Institute for Purposeful Leadership. We are currently working on developing an effective and practical customized Leadership Risk Mitigation Program to help investors identify and mitigate the leadership risk component of their investments.

In today’s highly complex, volatile and uncertain economy, risk and expected ROI are very much on the minds of investors. While risk is unavoidable, it can be significantly reduced. The most serious and difficult risk factor facing potential investors in start-ups and businesses in early stages of development deals with the founder-CEO. Investors’ expectations for the business prove over time to be significantly different than those of the founder. In the case of ROI, entrepreneurs often make decisions that conflict with the wealth-maximization principle of the investors (Noam Wasserman, The Founder’s Dilemma, HBR, February 2008).

The following statistics are stark: Within three years of a venture’s founding, only 50% of founders are still the CEOs of their companies ; in year four, the percentage is 40%, and by the time of the companies’ initial public offerings, the percentage falls to less than 25%. Most entrepreneurs are forced to step down. Change in leadership is often stormy and damaging for the prospects of young companies. A caveat: As founder-run companies grow and become mature, they have proven to be very successful at maintaining profitable growth (Chris Zock, Founder-Led Companies Outperform the Rest – Here’s Why, HBR, March 2016). But they are the minority. 90% of all start-ups fail.

The need to have the right leadership in place is the cornerstone of the success of young ventures. However, the attributes of the right leader change as a company grows from early stage start-up to a more mature and complex organization; from founder, to manager to strategic leader. The ROI depends on how well the CEO manages risk, while creating sustainable growth and wealth creation.

According to a recent study, there are four factors that predict start-up success when assessing the strengths and potential of the founder-CEO in the IT sector (See Tucker. J. Marion, HBR, May 3, 2016).

  • Age: Technology favours the young: Younger entrepreneurs in technolog c ompanies are a key success factor.
  • Diverse teams, including gender diversity: High-performing investments have at least one female founder; female-founded IT start-ups outperform all-male teams by 63%.
  • Education: A top education is a significant ingredient for start-up success. Companies with at least one founder from top school perform 220% better than other companies.
  • Experience: Prior work and start-up experience in top tech companies predict success of founder.

    o Investors view this experience highly as a form of pre-screening

    o Acquired hard skills (e.g., project management)

    o Acquired soft skills (e.g., politics and networking)

Other key factors that predict success include alignment among members of the investment group on risk tolerance, their understanding of the complexities of the sector they’re investing in, their expectations regarding the ROI and their expectations of the founder-CEO; and, finally, there needs to be alignment between the expectations of the investors and those of the founder-CEO on the type of leadership required at both the investors and CEO’s tables.

Identifying, assessing and evaluating the areas of alignment and misalignment between the investor group and the founder-CEO, and creating tailored-made coaching and mentoring programs where appropriate, is a crucial element in the work we are doing to mitigate leadership risk for investors in companies in the early stages of development.

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Succession Planning: Skills Gap & Corporate Risk

In our volatile, uncertain, complex and inter-connected world, the challenges facing corporate executives are often outpacing their cognitive abilities. This is undermining the sustainability of companies across North America, Europe and Asia. The need to find the right leader to navigate their corporations through these unchartered waters, teeming with unknown dangers and new opportunities, is paramount.

Increasingly, companies are hiring internal candidates for their top executive positions. Research reveals that CEOs brought in from outside the company succeed less often than those who are promoted from within. (Joseph L. Bower, More Insiders Are Being Hired and That’s a Good Thing, HBR, March 18, 2016). Hiring external senior executives is warranted however in some cases; for example, bringing in a Chief Digital Officer to overcome organizational inertia and to lead digital transformation and innovation. The ideal CEO is one who is promoted from within, but with as wide-ranging experience as possible working in different cultures and countries, a passion for deepening his or her knowledge and a rich network of contacts to broaden perspective. The ideal CEO looks at the “world in a way that allows one to weigh on opposing and contradictory demands and manage them on an ongoing basis.” (David L. Dotlich; Peter, C. Cairo and Cade Cowan 2014, The Unfinished Leader, p. xi) Companies with a history of success and innovation over the long-term, such as Johnson and Johnson and the Royal Bank of Canada, have placed the development of their next generation leaders at the top of their agendas.

Digital technologies are disrupting and transforming the economy. Nowhere is this more prevalent than in the media industry. According to a recent survey of 2,000 c-level executives, media companies anticipate massive disruption to their business models in the next 12 months (72%); followed by Telecom (64%) and Consumer financial services (61%). (Rhys Grossman, Industries That Are Being Disrupted the Most by Digital, HBR, March 21, 2016).

Even with digital strategies in place, the sheer rate of change has created a skills gap. This is undermining established companies, with legacy business models that still generate most of their revenues. It is difficult for companies and leaders to embrace change and break with the past. “Too many companies and leaders, and often the best companies and the most successful leader, struggle with the frustrating reality that the more deeply immersed you are in a market, a product category, or a technology, the harder it becomes to open your mind to new business models that may reshape that market or exciting way to leapfrog that technology.” (Bill Taylor, Companies Can’t Be Great Unless They Almost Failed, HBR, March 21, 2016).

In forward-looking companies, the task of driving growth and finding new meaningful revenue streams is often given to the Chief Digital Offer (or Chief Growth Officer). These companies create a culture of decision-making based on the best available evidence/data, which will enable them to manage the changes that lie ahead. This requires commitment that starts at the highest level of the organization: the board.

The management of board continuity and renewal, along with executive succession, is imperative for corporations. Increasingly, greater gender diversification is driving corporate governance , along with improved mechanisms for renewal of directors based on performance management and accountability.

A proper succession process for top executives requires considerable planning and time, sometimes several years, to implement successfully. The process of nurturing the most promising next-generation leaders within an organization is one of the most serious and complex issues facing business today. It is challenging for corporations, and their boards, to devote the time and resources required to properly nurture these leaders amid the intense pressure to achieve higher quarterly earnings. But those that don’t are falling behind.

The most successful companies understand that leadership development is one of the best investments an organization can make to ensure its future. Today, executive coaching is recognized as a vital component of leadership development. By committing to excellence in their corporate leadership, boards are fostering the enduring success of their companies.

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Reframing: The Hallmark of Great Leaders

The challenges facing today’s corporate leaders often outpace their cognitive abilities. Errors, failures and chaos are an everyday occurrence in the life of an organization – some are small, others are catastrophic such as the 2008 Wall Street debacle. Calamities occur because executives are unable to foresee clearly the emerging issues that will impact their organizations. They lack awareness and/or the skills to chart a different course. These executives are afflicted with what Lee Bolman and Terrence Deal (2003) call the “curse of cluelessness”. They are not the innovative leaders that their companies desperately need them to be. (See my November 2015 blog: Great Leaders: The Competencies Imperative.)

These executives regularly surrender to ingrained mental models instead of seeing old problems in a new light or finding more promising ways to solve persistent challenges. They inevitably do more of what they know. Communications in organizations aren’t always candid, open or timely. When challenges become issues, and issues become problems, some leaders may resort to “artful camouflage” to down play anything that might have a negative impact on unexpectedly poor quarterly results. At times, ambiguity is deliberate. But, more often, the information and processes are so complex and uncoordinated that they are unintelligible. In the end, irrationality often prevails. When companies flounder; it is usually due to managerial error. (See Charan and Useem, 2002.)

Ah… improving management is the answer. Organizations will work splendidly if properly managed. The short answer is rarely. Executives and consultants draw on a variety of approaches to improve their organizations ranging from Six Sigma to Emotional Intelligence. But these approaches, while worthwhile, can easily become dogma, blinding us to other possibilities. There is always more than one way to respond to a problem or dilemma.

An increasingly turbulent, rapidly shifting economy requires contemporary organizations to learn better and adapt faster just to survive. The ability to see things from various perspectives helps redefine situations so that they become understandable and manageable. This ability to reframe is one of the most powerful capabilities of highly successful leaders and the coaches who assist them. Leaders need to find new ways of seeing things. They have to create a coherent and compelling vision for the organization going forward. They need to articulate and communicate this vision so all their stakeholders (employees, boards, vendors, customers) can learn to shift perspectives when needed.

In devising his first telescope, Galileo discovered that each lens he added contributed to a more accurate image of the heavens. Similarly, successful leaders reframe until they have a solid understanding of the situation at hand. They do this by using more than one perspective, more than one “frame”. Bolman and Deal espouse the Four-Frame Model, comprising the following components: Structural (the architecture of an organization; its goals, structure, technology, roles and relationships), Human Resource (understanding people and their relationships), Political (emphasizing power, competition, and winning scarce resources), and Symbolic (focusing on faith and meaning). Each frame is powerful and coherent. Taken together, they enable us to “reframe”, to see the challenge or issue from multiple perspectives.

Research shows that the ability to use multiple frames is associated with greater effectiveness for leaders. When leaders are stuck and nothing is working, reframing is a powerful tool which coaches use to help executives initiate, effective, practical, meaningful and lasting change.

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CEO Performance and Board Oversight

Corporate governance is under increasing scrutiny. Intense competition, a shifting marketplace, increased regulatory review and activist stakeholders - these are the hallmarks of the myriad complex challenges facing today’s corporate boards. Directors are the stewards of their corporations. They are elected by shareholders to oversee the management of their organizations with the goal of increasing long-term shareholder value.

The board has the fiduciary responsibility to assess management’s performance and effectiveness. Its key functions include setting the organization’s strategic goals; the hiring, compensation and performance review of the CEO; succession planning; development strategies for key senior executives; and leadership’s readiness to deliver on the corporation’s goals.

In this heightened environment of governance accountability, boards are compelled to govern at levels once considered the exclusive purview of management. The immutable line between the roles of governance and management is blurring. Boards and management are defining their roles and responsibilities according to the particular situation unique to their organization. Nowhere is this more pronounced than in crisis situations (e.g. severe tensions between the board and the CEO, the abrupt departure of the CEO…).

The successful hiring and development of effective CEOs is especially challenging. The Economist (October 10th, 2015), notes that “confidence in business leadership is at a record low”, and fewer than 50% of respondents in an opinion poll trust CEOs. Furthermore, according to recent academic studies, one in two leaders is deemed a disappointment, incompetent, miss-hire or complete failure. In my experience, ingrained mental patterns which have been successful yesterday, may no longer be so. A strong track record of accomplishments does not guarantee an executive’s success today, let alone tomorrow.

Another serious issue facing corporate boards is CEO compensation. Some say that a CEO’s salary should be left solely to market forces. However, CEOs often command high compensation regardless of the financial performance of their companies and of the state of the economy. According to a study cited in Forbes (Susan Adams, “The Highest-Paid CEOs are the Worst Performers, New Study Says”, June 16, 2014), the higher a CEO’s compensation, the worse the company’s success over three years in terms of stock valuation and accounting performance. Chiefly, this is due to hubris: some highly paid CEO’s ignore differing opinions, their own limitations, and act according to what they have convinced themselves is right.

In 2013, 23.8% of CEO turnover in the US was due to dismissals (The Conference Board). The situation is no better for new externally hired or promoted executives. From 40% to 64% of these executives leave their jobs (voluntarily or otherwise) within the first 18 months of being hired. Many more underachieve. (See my blog, Great Leaders: The Competencies Imperative, November 2015).

The conequences for a board of not addressing purposefully the issue of CEO oversight, including leadership development, can be dire. Boards can find themselves with CEOs who lack required competencies such as:

  • A strategist who can’t deliver actionable plans.
  • A business or operations leader who can’t lead change.
  • A visionary who doesn’t pay careful attention to the bottom line.
  • A leader who can’t see beyond the ordinary, to identify new possibilities and the potential for the extraordinary.
  • An executive who lacks the emotional intelligence to manage effectively, losing key personnel.

The most successful organizations are those with strong corporate governance, and effective oversight of their human capital. To foster excellence in their senior executive leaders, boards understand that leadership development is one of the most important investments their companies can make.

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