Employees as the basis of value creation
Editorial by Alberto Gabbai Chairman of the Board of Cezanne Software
Wall Street and the stock exchanges of the world have no doubt: a company’s purpose is to generate profits to reward the shareholders.
While this is undoubtedly a key objective for any business, many academics and practitioners have claimed that this is a very narrow way of looking at a company’s purpose, and one that could – as recent events have confirmed - cause negative effects down the road.
The question of what is the “raison d’être” of a company in a competitive and capitalistic market has been the subject of discussion for almost a century. The debate has been between the “shareholders theory”, that limits the duty of management to producing profits for the shareholders, and the “stakeholder theory”, a more comprehensive vision, which states that the real purpose of a company is to balance the interests of multiple constituencies, which are inextricably tied to each other. Such constituencies include shareholders, but also customers, suppliers, employees, local communities, and possibly more.
For a long time this debate seemed to be put to rest when, in the 1960s, Milton Friedman’s thesis that the only allegiance of the management should be to the shareholders became widely accepted.
But, in the 1990s the idea that a company’s purpose is to satisfy its customers became all the rage, and the debate gathered new momentum with the recognition that only through value provided to satisfied customers can a company do well enough to also produce real and sustainable value for its shareholders. In that decade most companies made public a “mission statement” that almost invariably defined customer value first, and shareholders value only a consequence.
This change in perspective was part of a broader transformation in the global economic structure, where most businesses had to adapt from a manufacturer-centric system to a customer-centric system. In the current economic system it is undeniable that customers wield so much power that only their willingness to pay - and pay well - for products/services will generate the profits that reward the shareholders.
However, a perspective entirely focused on customer satisfaction may turn out to be as imperfect as a perspective entirely focused on shareholders value. A couple of months ago I was reading an interview with two CEOs of two different retail companies, where they both declared that the primary focus of their companies was neither the stock market nor their customers: it was their employees.
http://www.time.com/time/magazine/article/0,9171,1818183,00.html
In other words, keep your employees happy, and they will treat the customers in a way that will transform them into fans, and that in turn will keep the company’s shares soaring.
Indeed, in an industry where service employees are key to securing sales and repeat customers, and in an environment where top-notch talent is scarce, employee satisfaction can well become the main purpose of the business; it is the foundation of customer satisfaction, which in turn is the foundation of overall financial success.
As you’d imagine, the reality is more complex than that: in general the hard truth is that all goals must be pursued at the same time, which means that a constant quest for the right balance is necessary.
The focused pursuit of just one goal - whether it is shareholders value, customer satisfaction, employee satisfaction or something else - could be the best approach in a particular business environment, especially if the environment is stable; but this is only true if the factor on which we are focusing is, in the current situation, so prevalent that it trumps all the others in establishing the balance.
For many industries in today’s business environment, it is true that the employees play a primary role in producing the business results. This leads to the conclusion that the HR function should be a strategic partner in the company.
For HR to really achieve this status, there are two sets of actions that need to be undertaken.
The first concerns the hiring process: an employee would likely not be completely satisfied, thus not performing at his/her best, if there a cultural misfit between him/her and the company. For example, if yours is the kind of company that strictly enforces rules and policies, and loves to behave “by the book”, it would be unwise to hire creative and artistic people as they would be ill-fitted. Unless, of course, you want to change the company culture in the process, but this would be an entirely different project.
The second can be summed up in one word: measure. Every program, from training to compensation policies to performance appraisals needs to be measured against company results. It is a difficult task, with very few benchmarks to rely on; in addition to that, it is often industry specific, if not company specific. However, technology today is making it much easier for companies to collect and evaluate information - and make the link between their people policies and business performance. At Cezanne we have project teams with expertise in the field, and we would be happy to help any company develop these measures.
