Business and sustainable employment, parts I and II

Business and sustainable employment – Part I and II (August 5 and 19, 2004)

The View From Taft, Business World

Part I

Like most people, I was eager to know what the President had to say about the “State of the Nation” and what she wanted to do about it. Although she stopped short of mentioning that we have one of the most serious unemployment problems in recent history with more than 13 per cent jobless, I was happy that job creation was on top of her to-do list. Naturally, the president’s goal of creating 10 million jobs has triggered plenty of discussion. Some think it’s quite feasible while others think it’s two vague to mean anything. I think that job creation is certainly the most important thing to accomplish in this country. Everything else pales in importance. But I should add that job creation is a worthwhile goal only if we are talking about “real jobs” – jobs which are dignified, properly compensated and secure. I’d like to refer to this as the goal of sustainable employment.

I think that creating 10 million real jobs in 6 years is feasible. The trick is to go beyond the traditional economic strategy of creating the infrastructure for investments and giving incentives to businesses to employ. Sustainable employment can’t be achieved just by using incentives because the unemployment problem is caused by deeper reasons than economics alone. In fact, it arises from a limited view about business and its role in creating jobs.

The importance of having a correct view of a problem when attempting to solve it was emphasized most directly and simply by Albert Einstein when he said that "We can't solve problems by using the same kind of thinking we used when we created them." The kind of thinking we use to view a problem has been called by writers after Einstein as our “paradigm”. I appreciate how difficult it is to solve a problem with a limited paradigm when I drive through some of the narrow, potholed streets of Metro Manila in a thunderstorm with bad windshield wipers. It doesn’t matter if I drive an old car or a pricey one – I soon get hopelessly lost. I can’t find my way out using the same paradigm – a windshield covered with rain -- that got me lost in the first place. The paradigm is everything.

Our paradigms are conditioned by our education and experience. As we mature, we come to have certain beliefs about the world. If the beliefs are sound, our paradigms allow us to make correct decisions about the world. When the beliefs are unsound, our paradigms are flawed and it becomes impossible to solve the problems we face. In the case of business and employment, the ability of business and government leaders to solve the problem of unemployment is hindered by a number of limiting beliefs which lead to a limited paradigm. Let me discuss the most important of these limiting beliefs so that we can wipe them away and, thus, develop a broader paradigm.

Limiting Belief #1: A business exists to enrich shareowners.

Academics call this belief the shareholder wealth maximization theory of the business firm or, simply, the shareholder theory of the firm. It is the single most popular and persistent notion in business. Many of the most prominent thinkers in business and economics, such as Milton Friedman and Michael Jensen, have persuasively pushed this belief and it has been taught to generations of business students as the virtual “first commandment” of business.

The problem with this belief is that it defines a business as being mainly a money-making machine for those who invest money in it. While this view might be believable when we think of a small business owner who sets up a micro-enterprise to augment his income, it becomes less tenable when we consider the huge corporations that the State allows to exist. Will the State, in its right mind, give so much power to an entity so that it can serve the interests of a few? Who would tolerate such a monster? The framers of Cabinet Bill No. 3 which later became Batas Pambansa Blg. 68 or the Corporation Code of the Philippines showed every intent to debunk the shareholder theory when they stated in the explanatory note to the bill that “the proposed Code seeks to establish a new concept of business corporations so that they are not merely entities established for private gain but effective partners of the National Government in spreading the benefits of capitalism for the social and economic development of the nation.”

When we consider the goal of spreading the benefits of capitalism to others, it becomes patently clear that business cannot exist mainly to enrich shareowners. It also becomes clear that business has the duty to provide jobs. Russell Ackoff, in Recreating the Corporation, gave special importance to this duty because “productive employment is the only means available to society that both produces and distributes wealth.” He concluded that “the creation and maintenance of productive employment is a major social responsibility of corporations [and] failure to do this is … irresponsible from society’s point of view.”

The limiting belief of shareholder primacy must, therefore, be replaced by a broader belief which acknowledges the role of business in benefiting other stakeholders. This has come to be known as the stakeholder theory of the firm. Employees are extremely important stakeholders in business. It is through their knowledge and work that business creates value. They should, therefore, be accorded importance side by side with shareholders. In this broadened paradigm, a business is no longer a money-making machine for shareholders but a machine for social and economic development -- a national development engine.

Limiting Belief #2: Employees are costly, replaceable commodities to be minimized to maximize profit.

In elementary accounting, business students are taught that profit equals revenue less costs. This piece of arithmetic is wonderfully useful in giving a basic description of the profit concept. However, it has been a disastrous source of misconceptions in actually managing business. The arithmetic implies to many managers that revenue and costs are independent things. So, to increase profit given a level of revenue, one needs only to reduce costs. And guess which item of cost is conveniently available for reduction? Employees, of course.

This use of the profit equation is a gross misunderstanding of how a business works. Revenues and costs are not independent things. In fact, costs are incurred in order to create valuable products and services which produce revenue. Expenses on employees are not merely costs but investment in human capability which can be harnessed to continuously produce value through ideas, teamwork and knowledge. Viewed in this way, it becomes obvious that layoffs as cost reduction strategies are misguided because employees are not replaceable commodities at all but are, rather, knowledge partners in a business.

Downsizing, rightsizing, reengineering, or whatever name it goes by nowadays, is often done by short-sighted managers who manage by the limited view given by an income statement. The funny thing is that these are often the same managers who refer to their employees as their most important assets. In a revealing study of executive double-talk, Fortune looked at what top executives in he US said about their people in their 1994 annual report and matched this with how many people they got rid off during 1995.

“I have enormous confidence in the ability of the men and women of Boeing to meet the challenges ahead." Frank Shrontz and Philip Condit, Boeing (17,500 employees)

We are confident about the future for an ever brighter Texaco Star. It is a confidence that...rises from the dedication and talent of the people of Texaco." Alfred DeCrane and Allen Krowe, Texaco (4,000 employees)

We have to rely on the judgment of the people who really run this airline. The gate agents, the baggage handlers, the flight crews, the reservationists..." Gordon Bethune, Continental Airlines (4,000 employees)

Business is not a simple exercise in arithmetic. It is a complex human activity that requires competent management and inspirational leadership. Sustainable employment becomes possible once we broaden the limiting paradigm based on shareholder wealth maximization and employee cost minimization. Fortunately, this broader paradigm suggests practical approaches to building lasting businesses which will employ people for a long time. I will discuss this in the continuation of this column next week.

Part 2 (August 19, 2004)

In the first installment of this column, I argued that providing sustainable employment is a critical role -- in fact, a social duty -- of business. However, the limited paradigm of business makes it very hard for managers to fulfill this role because of its excessive emphasis on maximizing stockholders' wealth.

The stakeholder's view of business is broader and more faithful to the fulfillment of the social duties expected of the business corporation.

The stockholder paradigm is not useless; it is just misleading. In particular, it leads business managers to ignore their duty to employ people in a sustainable manner.

There are approaches to avoid this neglect of duty.

The first approach is to move away from overreliance on "management by numbers" to a more systemic view of the business. W. Edwards Deming pointed out long ago that businesses cannot be managed well by their managers' relying on numbers alone. Being a statistician, Deming did not mean that numbers should not be used. Rather, he was emphasizing the danger of thinking that accounting and financial numbers capture the essence of a business organization.

The numbers produced by management accountants and financial analysts should be supplemented by information on the learning and growth of people, as well as the responsiveness of processes to customer needs. Such information lets managers understand how the whole business works as a sustainable system.

Sustainability is about health. People are more likely to stay healthy and live longer if they understood how their bodies work and how the body parts work together.

Similarly, managers can better promote the health and longevity of a business if they understood how its parts work together in creating value.

Using a strategy map based on the balanced scorecard is a potentially excellent way to get a system picture of the business. A strategy map is simply a diagram showing how, for example, human resources use knowledge and growth to, in turn, drive business survival and growth. It shows, in a way that everyone will understand, that people are the key producers of value in a business organization. It also shows the recklessness of cutting in one part of the organization, say, by laying off employees, and not expecting detrimental effects in another part of the organization.

The second approach is to build high-trust relationships within the whole company and through its entire value chain. This area of leadership is often lacking in many organizations. The advantage of a business built on good relationships is that information moves quickly and freely within the organization. Coupled with strong leadership, this allows the business to adapt quickly to market needs and, therefore, to produce better value.

Anthropologist F. Landa Jocano tirelessly points out that Filipinos are particularly relational beings who have love for family as a core value. This attitudinal bias can be used to build cohesive, family-like organizational communities.

A third approach is to manage growth and to hire only the right amount of people. The founders of Sony Corp. and Hewlett-Packard walked away from large and profitable contracts when they knew that the contracts would require them to add additional employees who would only have to be laid off when the contracts ended. These companies hired people very carefully and only at levels that they could sustain.

Managed growth is a key to sustainable employment, because it avoids the wild gyrations in head count experienced by many companies. For example, although Southwest Airlines has been consistently profitable for the past decades, it refuses to grow faster than the rate at which it is able to recruit the right kind of people who will blend with its fun culture and deliver service the way it wants. Companies that manage growth based on intimate knowledge of their internal system capabilities know that grabbing market share by expanding too rapidly cannot be sustained.

A fourth approach is to use layoffs as a very last resort. Layoffs remind me of the old medical practice of bloodletting. In the old days, doctors would bleed sick patients to heal them. This was based on a misguided notion that lessening the blood in the body would balance the four bodily fluids (so-called "humors") and, thus, restore health. Scientific medical knowledge has since stamped out bloodletting for sick patients, but the practice is alive and well, in a manner of speaking, among managers who think that they can make their companies healthier by laying off employees.

Companies that believe in the importance of their employees for sustainable success hesitate to lay off employees. At one time, Toyota was faced with thousands of redundant employees due to business slowdown. Instead of laying them off, the company reportedly formed them into process improvement and cost reduction teams. The savings from the ideas generated more than made up for the cost of keeping the employees. Toyota is now, of course, one of the top performing car manufacturers in the world and is a leader in producing innovative cars using alternative fuels.

There are many alternatives to layoffs during a business downturn. Internal transfers, reduced workweeks, retooling and -- dare I say? -- across-the-board pay cuts starting with the company president going down. Business is cyclical, after all, and what a company does with its employees during the downturn is an investment in improved commitment and competencies for the upturn.

In the end, sustainable employment is nothing but the willingness of shareowners and managers to concede that employees are true partners and fellow stakeholders in the value creation enterprise that is business. Companies that believe in this paradigm become just and humane organizations that continuously provide the dignifying benefit of employment.