Many large, progressive global companies are becoming dynamic, organic, decentralized organizations in which leaders use shared values, mission, and purpose to gain alignment with corporate goals on the one hand, and commitment to innovation and processes of adaptive change, on the other. Succeeding in this mission depends on the leader’s commitment and support. Would-be progressive leaders will learn how to make the transformation by reading this article.
With increasing frequency, farsighted corporate leaders, the business media, and the most progressive business schools are using a new management vocabulary. This new lexicon includes words and phrases such as Globalism, Sustainable Growth, Stakeholders, Continuous Innovation, Corporate Culture, Ethics and Values-Based Leadership. While these words may appear unrelated, the dots between them can be connected. When they are, they constitute a formidable challenge for the business community: Leaders of global corporations must learn how to create socially and economically sustainable corporate cultures.
This challenge is as complex as it is important. Its complexity derives from the fact that it contains numerous and disparate elements. These elements include:
- The manifest need to protect the environment by using natural resources wisely and by proactively addressing issues of pollution and global warming;
- The moral imperative to treat workers in developing nations with respect and dignity, a responsibility that includes training and educating workers to be able to contribute to the long-term development of their nations;
- Implicit social responsibilities to all domestic corporate stakeholders, including employees, customers, suppliers, dealers, and host communities;
- The legal imperative to obey all the laws in every country where a company operates, including complying with regulations and reporting procedures, as well as beyond the letter of the law, to include ethical business practices and organizational governance.
The challenge is important because, when met, it will provide for the long-term profitability of the organization. For no matter how well a company may perform its non-economic functions, it will be viewed as a failure if it fails to fulfill its traditional task of providing customers with the goods and services they need, at prices they are willing to pay. To do that requires an effective business strategy along with the appropriate internal management practices needed to create continuous organizational self-renewal, innovation, and customer responsiveness—all of which are needed for sustainable long-term growth.
The red ball of profit
While the centrality of this complex set of challenges has become increasingly clear in recent years, it is far from new. In 1975, the CEO of pharmaceutical giant Johnson&Johnson presented his executive team with exactly those challenges. He sent the team on a two-day retreat to discuss the founding document of their company, the J&J Credo, which had hung unheeded and yellowing on company walls for decades after it was penned by the company’s founder. The Credo outlines the company’s specific responsibilities to all its stakeholders, starting with its customers—the doctors, nurses, patients and mothers of sick children who buy the companies medicines—as well as its suppliers, employees, host communities and, finally, the company’s share owners.
Toward the end of the meeting, one of J&J’s top executives summarized what he saw as the reality of corporate life. He said that being an executive in a large company was like being a circus juggler, attempting to keep five balls in the air simultaneously. Four of those balls were white (those representing customers, suppliers, employees and communities). The fifth ball, the one representing shareholders, was red. To the approval of most of his fellows in the room—and, in fact, reflecting the beliefs of the vast majority of corporate mangers at the time—the executive said it was possible to drop one of the white balls and still survive, but allowing the red ball of profit to fall would be fatal. At that point, the company’s president, James Burke, spoke up and said: “My friend, I am afraid you are wrong. Today, all the balls are red.”
By being the first corporate leader to acknowledge this new reality, and thus to accept the challenge of balancing the legitimate needs of all of J&J’s stakeholders, Burke later went on to become one of the most successful CEOs in North America. When his European competitors paid bribes to win business in developing markets, he refused to do so. When it was discovered that eight people had died from ingesting cyanide-laced Tylenol capsules (a J&J product), he immediately assumed full responsibility for the deaths, pulling $100 million worth of the analgesic off drugstore shelves. He then opened the company’s executive suite to the media and dealt with the issue in a transparent manner that, to this day, stands as the model for corporate crisis management. His critics in the financial community said he was a fool to do so, and that his actions would cause the company to go bankrupt. He was urged to put the interests of his shareholders first: Remember the red ball! Later, it was discovered that a psychopath had placed the poisoned bottles on the shelves of only a few stores in one city; therefore, the company was not responsible for the deaths. But by publicly assuming responsibility before that fact was known, J&J built such a strong reputation for integrity that it recovered quickly and went on to new heights of profitability.
In short, Burke did what was the unthinkable in North American big business in the 1980s and 90s: He sacrificed short-term profits to do the right thing for his company’s stakeholders in the conviction that it is the long term that counts. That he was right to do so is a lesson finally being learned in the executive suites of many large American companies. Clearly, it is accepted practice in Europe at such companies as Ikea, in Japan at Toyota, and even in the developing world, at companies like Tata in India. In progressive global companies on almost all the continents, leaders are now seeking to create and to maintain responsible, healthy, and ethical corporate cultures.
But that task is far from easy. Research shows that truly transforming company culture is extremely difficult. In fact, there are very few cases where attempts to change a large, established company’s strategy, structure, systems, and behaviors have succeeded. A large part of the problem is that leaders in large companies traditionally have used centralized power and controls to change their large, bureaucratic, and hierarchical organizations. But that form of organization and type of leadership are no longer the norms in the organizational world. This is mainly the result of the recent confluence of factors such as changing social and workplace values, globalization, information technology, and advancing managerial knowledge. Today, many large, global companies are becoming dynamic, organic, decentralized organizations in which leaders use shared values, mission, and purpose to gain alignment with corporate goals on the one hand, and commitment to innovation and processes of adaptive change, on the other (all of this occurs in the context of a stakeholder perspective.)
Let me offer an improbable example of such leadership. I say “improbable” because it is about an old-line company in a dirty, unglamorous industry. The company is Alcoa, a global producer of aluminum and other metal products, with 130,000 employees at 436 locations in 43 countries. Traditionally, companies in the mining and metal processing industries have had notorious reputations for environmental degradation, particularly in the developing world, and for the effects of their operations on worker health and safety. Indeed, when Paul O’Neil became CEO of Alcoa in 1986, there was no gainsaying the fact that the company’s workers around the globe were routinely injured, maimed and killed on the job. A great many suffered long-term health effects from job-related diseases. The company’s manufacturing practices also put the health of residents in host communities at risk of having their health compromised by air and water pollution, and the inappropriate disposal of solid waste.
O’Neil took the CEO’s job at Alcoa on one condition: That worker safety and health would become the company’s number one priority, and that Alcoa would establish as its primary goal zero days lost to injury, zero fatalities, and zero work-related illnesses. In effect, he put safety above the red ball of profit. To meet those high standards, O’Neil had to change Alcoa’s entire corporate culture—and, perhaps more difficult, to change the expectations of Wall Street. He had to involve workers at all levels and unions in all the nations where the company had operations. Over the next decade, employees participated in thousands of local health and safety initiatives, for which Alcoa had to develop new education programs and establish new performance measures and rewards. The company even had to change the way meetings were conducted. Henceforth, no matter how many people were present and from whatever organizational level—shop floor to boardroom–all meetings would begin with a safety review. And then O’Neil had to convince investors that such actions were necessary to create a sustainable future for Alcoa.
O’Neil is now long gone from the company but, significantly, his commitment to making health and safety a priority has become institutionalized at Alcoa. To this day, the company reports real-time data on injuries and days lost on its public web site. These and other practices are now copied around the world by companies seeking to become responsible organizations.
New ways of thinking
This improbable example is also an important one because, if an old-line company in an extractive industry is capable of making such a change, there is good reason to believe that companies in cleaner industries are capable of initiating similar transformations. Yet, leaders at North American companies such as General Motors, Chrysler, and Ford often say that they cannot change their practices. They claim that they are prisoners of competitive market forces, slaves to union contracts, and stuck with current technologies. Perhaps, but motorcycle manufacturer Harley-Davidson does business in the same markets as the Big Three automakers, has a similarly strong union, and uses similar technologies. Yet, despite those impediments (and unlike the car manufacturers) Harley-Davidson nevertheless has undergone a remarkable transformation in recent years.
In 1989, Harley-Davidson was on the brink of bankruptcy, offering products no one wanted to buy and saddled with union contracts that made it uncompetitive against Asian manufacturers who employed cheaper labor. That year, Richard Teerlink took over the handlebars as Harley’s CEO and immediately began listening to customers and motivating his employees to produce the high-quality motorbikes those customers said they wanted. He renegotiated the union contract and put all 5,000 of the company’s workers on incentive compensation, rewarding them for their ideas and efforts to improve product quality and customer service. This was rather “un-American” of him in that he didn’t lay off workers to show Wall St. how tough he was, didn’t off-shore jobs, didn’t grandstand by engaging in a high-profile merger or spin-off, and didn’t lock himself up in the executive suite with a team of accountants and finance experts who wouldn’t know a motorcycle from a bicycle. By the beginning of the current Great Recession, employment at Harley had doubled to nearly 10,000 workers as company sales, profits and exports grew. Over the same period, the Big Three automakers lost significant market share and laid-off over two-thirds of their workforces, while their leaders claimed it was impossible for them to do the very things Teerlink was doing at Harley. As Albert Einstein is quoted as saying, “You can’t solve a problem from the same consciousness that created it. You must learn to see the world anew.”
We can see how the thinking at Harley is different from traditionally managed industrial firms. But, do all non-traditional companies such as Harley, Alcoa, Ikea, Toyota, and Tata have anything in common? While the national cultures of the United States, Sweden, Japan, and India all are different and distinct, the corporate cultures of these companies are remarkably similar. The culture of each of these global companies is characterized by a credible belief system, clearly articulated values and high purpose, coupled with a firm commitment to live and practice those in all their activities and operations everywhere around the globe. One of those key values is community, both in the sense that employees experience the security and support of the entire organization, but also of being part of the particular, local community where their operation is located. They are even a part of a global community, planet earth. In addition, these companies all are decentralized organizations marked by high levels of employee involvement (that is, places where workers see that they can make a difference in company performance, and are rewarded for doing so). All have managerial processes that impose discipline by fixing decision rights and accountability (thus insuring alignment between overall strategic goals and the actions of front-line business units); all are transparent organizations in which people feel free to express their ideas, and all have systems that reward continuous change and innovation.
Let me offer another improbable example, this one a global company with no hierarchy, no bosses, no job descriptions, no rules, and no titles. W. L. Gore and Associates is a $1.5 billion company with 6000 employees who make a thousand different chemical-based products. Since its founding in 1958, the company has practiced what its founder called “non-management.” To nurture a sense of community, and to facilitate communication, the organization is broken down into units of about 150 workers each. Each new hire is assigned to a team and simply told, “Go find something useful to do.” Each year, all team members evaluate each others’ performance to determine compensation (and all share in company profits). Team leadership is continually shifting. Employees each spend about 10 percent of their time developing long-term, speculative product ideas, and all are free to launch a new team to commercialize a product whenever they are able to attract followers among other employees. Thus, one year Mary may be a member of a team Joe is leading, but the next year Mary may be the leader and Joe a team member.
The purpose of this “non-management” style is to liberate employees to innovate and make fast decisions without needing the approval of layers of management. Chaos, some would say, but in place of inflexible rules W.L. Gore and Associates has four governing principles that create organizational alignment:
- Try to be fair to all associates, suppliers, and customers.
- Allow, help, and encourage all associates to grow in knowledge, skill, and scope of responsibility.
- Make commitments and keep them.
- Consult with others before making high-risk decisions that would endanger the enterprise.
Ethos and ethics
The four above principles are, of course, ethical precepts. It is significant that the word “ethics,” dealing with individual moral behavior, has the same etymological root as the Greek word for culture, ethos. The element common to the two words is character. Ethics refers to the moral character of individuals, while ethos refers to the moral character of a group or organization.
It is useful to examine the relationship between the two concepts by looking at the corporate culture of the retailer Costco, whose main competitor is a subsidiary of the global giant Wal-Mart, known as Sam’s Club. Wal-Mart is a non-union, low-wage company that offers scant health insurance to its hourly employees and invests little in their training and development. In contrast, Costco is a unionized, high-wage, high-benefit company that invests heavily in employee training and development. For example, in 2004, the average Wal-Mart employee earned $24,000 per year while the average at Costco was $33,000. Significantly, total labor costs at Costco were far lower than they were at Wal-Mart because Costco workers were far more productive, needed less supervision, were more committed, had lower rates of turnover, and contributed their efforts and ideas to improve operational efficiency and customer service. Like many traditionally managed U.S. firms, Wal-Mart is convinced that it has no choice but to pay low wages to keep the prices of their goods low for consumers. In essence, it ignores the fact that what really counts is total labor costs, not unit labor costs. As early as the 80s, Peter Drucker had called attention to the fact that workers should be seen as resources to invest in rather than as cost centers. Wal-Mart has never accepted that fact.
But what truly differentiates Costco and Wal-Mart is their respective cultures. Costco’s culture stresses the importance of each worker. The company trains–and then trusts–its employees to make decisions, solve problems, and take initiative in the absence of supervisors and rules. This culture has positive consequences that go beyond the workers’ high productivity: It positively affects the character of employees. For example, a few years ago, a crazed motorist in Los Angeles drove his SUV onto the railroad tracks, into the path of an oncoming commuter train. He jumped from his car at the last second, but the ensuing crash was terrible: hundreds of passengers were injured, and several killed. The collision occurred outside a Costco store. On hearing the crash, Costco employees immediately organized themselves into a rescue brigade. Loading first aid equipment and fire extinguishers on their backhoes and forklift trucks, they set to work freeing trapped passengers and administering first aid before professional emergency “first providers” arrived on the scene.
This initiative was not coincidental. In fact, experience shows that workers in high-involvement companies like Costco, Alcoa, and W.L. Gore tend to be more active citizens and parents than those who work in low-involvement organizations like Wal-Mart. The former are more likely to vote, participate in their children’s PTA, contribute to local charities, and be involved in civic activities. Hence, the Greeks had it right about ethos: The culture of a group is related to the character of an individual. Ethos and ethics are thus concepts emerging from the same deep root.
Companies with high-involvement cultures are also more likely to be leaders in protecting the environment. In the early 1980s, California-headquartered Patagonia was the first company to practice what is today called “fair-trade.” The company, which imports fabrics and finished goods from developing countries, has long insisted on paying fair wages to foreign workers and fair prices to suppliers, and on making sure that local communities in those countries share in the benefits of international commerce. Patagonia also donates one percent of its profits to grassroots environmental organizations and grants its employees up to two months paid leave to work in NGOs. (The company even allows its California employees to take time off during working hours to go to the beach when the surf is up, trusting them to make up the lost time at their discretion.)
Organic food retailer Whole Foods is perhaps North America’s leader in supporting environmental NGOs and for its efforts to protect the planet and reduce global warming. Not coincidentally, employees of Whole Foods share in the ownership, management, and profits of the company to an unusually high degree. In the typical American company, 75 percent of stock options go to the CEO, 15 percent to the next fifty highest-compensated executives, and only 10 percent to all other employees. But at Whole Foods, 85 percent of stock options go to non-executives. In large U.S. corporations, CEOs typically earn at least 400 times more than the average worker in their companies earns. At Whole Foods, the ratio is only 19:1.
Significantly, the leaders of Costco and Whole Foods are solid capitalists who are adamant that they are not running charities. In fact, these and all of the companies I have cited are both highly profitable and effective in competing in world markets. Starbucks is perhaps the most widely known of these new global champions. It is a leader in fair trade, a leader in environmental practices in countries where it operates, and perhaps the world’s leader in terms of how it treats its employees. For example, in the U.S., where hardly any employees of fast-food chains earn above the minimum wage, and where practically none have employer-provided health insurance, even part-time Starbucks workers are eligible for health care, stock options, pensions, and college tuition reimbursement. These practices were recently dismissed by the CEO of a conventionally managed company who said, “Well, if I could charge the equivalent of $4.00 for a cup of coffee for my products, I could afford to take care of my employees as lavishly as Starbucks does.” Starbucks’ CEO, Howard Shultz, quickly answered. “You don’t understand. You have it backwards: I am able to charge $4.00 for a cup of coffee BECAUSE of the way I treat my employees.” In essence, it is because Starbucks employees are productive and motivated to provide good service that the company grew and prospered over several decades. Significantly, even when faced with hard times and declining profits in the 2008-09 recession, Costco and Starbucks did not abandon their commitments to their employees and other stakeholders.
There is solid science to support Schultz’s assertion that high-involvement cultures lead to high productivity. In the only scientifically valid study of the motivations of a cross-section of the entire U.S. workforce, researchers unveiled the secret of why leaders of companies such as Starbucks, Gore, Costco, and Harley-Davidson have been able to create working conditions that effectively tap into the deep wellspring of worker motivation. This 2002 survey of 3,000 workers, undertaken by the U.S. Census Bureau, found that there are two main sources of employee motivation, loyalty, commitment, and productivity: one, participation in decision making, and two, participation in the economic returns of the organization. The researchers found that the greater the participation in decision making, the greater the loyalty, commitment, and productivity of the worker. The greater the extent of participation in economic returns — in the form of profit sharing, stock ownership, stock options, and the like — the greater the worker loyalty and commitment. And, when the two forms of participation were combined — that is, high levels of employee involvement and ownership — the more positive the effect. In addition, it was found that the greater the level of participation, the more ethical the behavior of workers (for example, employees in high-involvement cultures were the most willing to intervene when a co-worker is under-performing or misbehaving).
Indeed, there is an ethical principal underlying these scientific findings: participation in decision making without participation in financial gains is unjust because executives and shareholders then reap the fruits of employees’ contributions. And participation in financial gains without participation in decision making is also unjust because workers are then powerless to influence the conditions that determine the size of their paychecks. The two forms of participation are thus positively linked, morally and practically.
This linkage has long been recognized in reward systems designed for top executives. But it also has been shown to motivate lower-level employees, as well, even with those with relatively little education. For example, SRC Holdings has been operating for several decades by what its founder, Jack Stack, calls “open book” management. When Stack purchased this bankrupt re-manufacturer of diesel engines, he bought a company with old technology and facilities — and a disgruntled workforce with a relatively low average number of years of schooling. He proceeded to teach all his workers everything he had been taught in business school, giving them all the equivalent of an MBA degree by teaching them to read balance sheets and income statements. He then shared all the company’s managerial and financial information with the employees and involved them all in profit sharing and decision making. Soon, those employees were finding ways to make the company more efficient and profitable. This unusual culture of trust, accountability, fairness, and transparency not only has had positive business consequences, it has had positive ethical consequences as well. In the era of Enron, the company never had any problems with financial smoke and mirrors practices. SRC’s CFO once commented, “It is like having a thousand internal auditors out there.” Jan Carlzon, former CEO of Scandinavian Airlines, explains the source of this ethical phenomenon: “An individual without information cannot take responsibility; an individual who is given information cannot help but to take responsibility.” And Jack Stack’s approach is not just applicable to companies in developed countries. Ricardo Semler, the CEO of Brazil’s Semco SA, has documented how it works in his developing South American country.
The most important product of the cultures I have cited is the shared feeling of trust, the glue that holds any type of community together willingly and without a need for coercion. That sense of community is fueled by a company’s investments in the development of its employees. And making such investments is perhaps the clearest and strongest moral obligation any company has. Since Aristotle, it has been known that the greatest life satisfaction comes when people are engaged in realizing the potential with which they were born. Because modern corporate employees invest the largest part of their waking lives at work, the workplace is the only venue where they have the opportunity to realize their potential. Hence, when they are given the opportunity for development on the job, they almost always respond gratefully through enhanced productivity and loyalty.
The future of work in developed countries
And that is why workers in North America can compete successfully with workers in low-wage countries. That is, they can compete if their employers provide them with the right conditions—specifically, participative cultures in which they have a personal opportunity to grow by making a difference, that is, by “adding value” in economic terms. The greater the opportunity workers have to add value — as they have at Costco, SRC Holdings, and W.L. Gore — the more innovative and productive they will be. Most important, by adding value through their own ideas and efforts, they actually earn the higher the wages they receive, higher than their less-educated, less-productive counterparts in the developing world are paid for adding less value.
Let me again offer an example: The Wisconsin-based company, Trek, is able to export bicycles to the world because its American workers are empowered to make continual improvements in their products and work processes. The employees are rewarded appropriately. They are educated men and women who love to ride bikes and don’t for a moment think of themselves as industrial workers, even though they build bikes mainly by hand without the help of much automation or machinery. Instead, they see themselves as self-managing innovators working on important matters, that is, on things that are meaningful to them. The result is that Trek’s workplace creates a constant stream of new products that forces the poorly paid, under-educated, and micro-managed workers making copy-cat bikes in South Asian factories to continually play catch up.
The Trek approach is, of course, the norm in high-tech industries where computer nerds are rewarded for constantly tinkering and innovating. The result is continuous improvement, innovation, and growth. Evidence shows that the comparative advantage of having educated, motivated, and committed workers, such as Trek’s, can be realized by a wide variety of businesses, high tech and low. But that will happen only if companies have the appropriate organizational practices that allow, and reward, workers to add value.
A unified theory
In conclusion, we now can see how the disparate elements of the new management lexicon add up to a Unified Theory of Global Management:
VALUES OF LEADERS
[as influenced by external social/ political/market forces
their personal experiences, background, and choices]
Culture/Ethos of Organizations
-decision rights/degree of decentralization
Behavior of Individuals
-productivity and performance
-attitudes toward customers
-willingness to change/participate/innovate
-quality of goods/services
-sense of community/trust
In essence, the values of business leaders are the primary drivers of the culture of an organization. That ethos — manifested in organizational purpose, structure, design and rewards — influences behavior, as measured by the extent to which employees are motivated, identify with the company’s mission and goals, and are committed to innovate and serve customer needs. And their behavior yields results, whether measured financially, in terms of profits, or socially, in terms of responsible and ethical global citizenship. Thus, it all begins with leadership and, in particular, with the values of leaders. Their values –what they hold dear and how they wish their contributions to society to be measured —ultimately determine the behavior and results of their organizations. The more faithfully leaders create values-based cultures that build a strong sense of community through employee involvement, the less need there is to exercise central controls, and the more likely companies will respond appropriately and continuously to the changing needs of all their global stakeholders. So now, we can connect the dots in the new global management lexicon:
Values-based leadership » Robust corporate cultures » Productive, innovative, and ethical behaviors » Sustainable growth.
This article will appear in James O’Toole and Donald Mayer, (eds.) GOOD BUSINESS: EXERCISING EFFECTIVE AND ETHICAL LEADERSHIP, Routledge, 2009.
Jan Carlzon, Moments of Truth, Harper & Row, 1987
James O’Toole and Edward E. Lawler III, The New American Workplace, Palgrave Macmillan, 2006
James O’Toole, Leading Change, Jossey-Bass, 1995
Warren Bennis, Daniel Goleman, James O’Toole, Transparency: How Leaders Create a Culture of Candor, Jossey-Bass, 2008