Corporate Bulimia: Why Current Profitability Models are Unsustainable & What to Do about It.

Corporate Bulimia: Why Current

Profitability Models are Unsustainable…& What to Do About It

By

Dr. William (Bil)l DeMarco

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Abstract:

Over the past few decades, profitability has become almost the exclusive driver for most businesses due to the unrelenting-short term profitability demands of boards and shareholders.  Service to all stakeholders, superior quality, leading edge research, and executive & management development have all become casualties to the lowest hanging fruit in most organizations: cost-cutting.

Key business and government decision makers, including boards of directors, need to be weaned off of what has become an addiction to “chop-chop, cut- cut leadership”, because it is an unsustainable “fools gold” model of what good performance looks like, not to say anything of their fiduciary responsibility to sustain the enterprise. This has led to an obsession with having more profit in the next quarter/year than the last, with the ultimate goal of becoming/remaining the biggest  company in the industry.  Stockholders are rarely educated about what good really looks like.

Part One of this article points out why the current profitability model is unsustainable, and how we got here. Part Two is all about what inspired leaders can and should do about it.

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 Part One

Profitability is the gaining of advantageous returns on investments. When I began my career decades ago, there was discussion about the role of service to customers, respect for employees, and service to the community as a major if not primary purpose for a business’s existence. That was still the era of mutual insurance companies, multi-generational company employers/employees, banks partnering with customers and the community for the general good, and company towns.

Much has changed since those days. We have experienced a steady diet of downsized companies, unemployment rates so severe that even unemployment statistics fail to count the millions who have just stopped looking for employment, entire key industry sectors eviscerated or just moved offshore, millions of minimum wage jobs replacing well paying pensionable jobs.  Even mutual insurance companies, originally founded to perform some noble purpose for widows, orphans, and the general public, have almost all migrated to for-profit models.

There has been a gradual but undeniable redefinition of what a well run company looks like: profitability irrespective of the quality of customer service, employees treated as commodities, and service to the community frequently taking the form of events sponsorship and naming rights. One of the most glaring changes has been around pension funding.  Defined benefit (DB) programs, once very  highly valued for their secured pension fund  savings, have mostly been replaced by defined contribution (DC) profit-driven models. According to a Bloomberg 2018 report, the reliance of both pension models on stock investments over the last decades has led to a significant underfunding of  the pension reserves. Governments in both the U.S. and Canada, responsible for overseeing the funding of contractually agreed-to pension plans, allowed this, frequently charging an administrative fee for deferring funding company pensions, placing those administrative fees into government operating funds. All of this has led to a domino effect, not unlike families today relying on borrowed money (credit cards, lines of credit, home equity loans, etc.)…it looks good in the beginning until it comes time to pay the bills, or the income line slows down.

Feeling the profits-now pressure of most stockholders, company leadership very frequentlyThat failed to fund their pensions by taking “contribution holidays”; in Canada, federal and local governments that allowed this to happen were ostensibly trying to keep jobs within their jurisdictions.  During that time, Ontario pension law was not significantly different from other North American jurisdictions. Companies that took pension fund “contribution holidays” hoped to achieve higher market evaluations, stock splits, and other market-related activities that would generate “money” more quickly.  This in turn, would put a “happy face” on the next financial report. Hundreds of stock history shows us that this is unsustainable; stocks that go up in value do eventually go down as well.  While running out of resources to”sell off” and the ” happy face” approach to putting a good face on financial statements  quickly deteriorates to a personal and corporate survival issue.  Of course this is understandable at a purely human level, but this  hehavior has little to do with sound leadership.

To illustrate this, I once had a major Fortune 500 Company client that had a fantastic year-end in Europe, driven in no small part by the strength of the American dollar vis-à-vis the German Deutschmark.  European executives received large bonuses. In all these cases, irrespective of whether it was pension- related or not, we have examples of a “fools gold” model of what good performance looks like.

Like a drug addiction, these companies over time failed to see what was happening until it was too late. The Fortune 500 Company just mentioned, like so many others, was eventually sold off in parts. They all failed to recognize what really counted was truly growing the business through innovative new products, superior customer service, increased sales, constantly returning happy customers and more effective operations; for companies with under funded pension liabilities, this is particularly more important than the risky roll of the dice they too frequently engage in.

“Insanity is doing the same thing over and over again

and expecting different results.” – Albert Einstein

Governments in both the U.S. and Canada, responsible for overseeing the funding of contractually agreed-to pension plans, allowed this, frequently charging an administrative fee for deferring funding company pensions, placing those fees into government operating funds. All of this has led to a domino effect, not unlike families today relying on borrowed money (credit cards, lines of credit, home equity loans, etc.)…it looks good in the beginning until it comes time to pay the bills, or the income line slows down.

In the early to mid 1990’s, it seemed to work well for everyone. These diverted pension funds initially bolstered quarterly company and government numbers. Many pension funds even ran surpluses, while quarterly company profits looked rosy. As time went by, these under funded pension liabilities reached minor (1999) and not so minor (2008) tipping points as stock values deteriorated. Coupling these events with the ever-increasing number of retirees, even once venerable companies like General Motors frequently faced a perfect storm: ever-increasing underfunded pension liabilities, deteriorating value of corporate investments, and a rapidly growing number of retirees. The beat went on so relentlessly that by the end of 2011, 93 percent of federally regulated DB plans were under-funded according to the Office of the Superintendent of Financial Institutions of Canada.

The situation has gotten even more dire since then. For example, an August 2012 study by the credit rating agency Dominion Bond Rating Service Limited (DBRS) looked at 451 major corporate DB plans in the United States and Canada, including 65 north of the border. It found funding deficits of US$389 billion. DBRS noted more than two-thirds of the plans were “underfunded by a significant margin” and heading into a “danger zone, ” the point at which reversing the deficit becomes extremely difficult.As of 2018, with the highest stock values ever, these dangers have been masked for the time being; but hundreds of years of stock market history show that there will be a downward trend in the future.  That “danger zone” is still lurking.

I am not attempting to be critical of stockholders or pensioners here; they are on the receiving end of a profitability model which common sense would dictate is not sustainable for the long haul. Unfortunately, there ends up being multiple victims in this scenario… including stock holders/pensioners who rely on recurring profits for sustenance and lifestyle choice.

There are fundamentally two ways of achieving profitability: (1) grow the business through the judicious design and distribution of market-desired goods and services; (2) cut costs. The latter has become the dominant, and uninspired business/government means of obtaining more desirable numbers, because for all its management challenges, it is relatively easy to achieve and does not require much real business imagination. Of course companies need to be judicious with how they manage their businesses. However, there is an increasing obsession today with beating the analysts’ predictions, getting “bigger” , becoming the biggest in the industry at all costs, beating last quarter’s/year’s numbers no matter what, etc. etc. Executives of major companies enjoy hefty bonuses when this is achieved, frequently achieving seven and eight figures, irrespective of the sustainability of the means used to achieve such results. Company and government decision-makers have become too often addicted to the opiate of what I call “cut-cut, chop-chop leadership”, as if there is an endless supply of physical and human resources to be cut, or suppliers willing to provide goods and services for almost nothing. In this scenario, the temptation to cut salaries/benefits is great since human resource expenses account for over 50% of overall expenses for most companies; and the savings can go to the bottom line almost immediately.

Key business and government decision makers, including boards of directors, need to be weaned off of this addiction to “chop-chop cut- cut leadership”.  This management addiction is absolutely not sustainable for the long haul; and the lure of this borderline unethical yet highly profitable practice for too many executives/ board members to sell off the company is so very tantilizing.  in spite of their fiduciary responsibility to sustain the enterprise. In 1957, the average life expectancy of a company in the S&P 500 index was 75 years. Today, it’s less than 15 years.

There is a better way. It requires inspiration, courage, and real leadership where the enterprise is given a real purpose, recognition in high places that making money is a result not a purpose, and stakeholders at all levels give their willing effort to support that purpose. This is not a call to go back to a bygone era of any form of utopianism (welfare/ social / Nordic/ Rhine capitalism). Rather, it is a call for a common sense that recognizes that current profitability models are unsustainable for stock values do go down.  To make a real difference,  senior executives need to think and behave for both the short AND long haul, rather than leaving this untenable situation for their successors to handle! Of course, this assumes that stockholders and their elected boards are interested in the long haul instead of cashing out for frequently obscene amounts of money when there is precious little left to cut, and selling/going offshore appear to be the only options left.

Let me offer an example. About twenty years ago, I was a senior executive at a major consulting firm. A client of our firm for many years was a global aerospace company, known for its decades of engineering creativity and performance. In recent years, they were having difficulty growing the business, mostly due to a risk-averse culture and leadership. The firm’s ceo and the board really needed positive year-end numbers to beat the buzz on the street about the company’s financial underperformance.

Since I was responsible for our Organizational Effectiveness Practice, our consultant responsible for the account asked me to come in to help the special ad hoc committee put together by the CEO to come up with some way to quickly improve the bottom line numbers. The reality was that the CEO had a white knight willing to “invest” several billion dollars for new product development, subject to agreeable year-end numbers. The committee chair was an executive vice-president. He and his staff had come up with one recommendation, which they wanted me to put our firm’s reputation behind when he presented it to the CEO. The suggestion was to implement an early out program for all employees over 52 years of age. The amount saved in salary and benefits would marginally surpass the targeted amount sought.

I asked two related questions: “Does an aerospace engineer with thirty-plus years experience have more business and technical knowledge/capability than an engineer with ten plus years experience? Why get rid of just about all of the knowledge, capability, and experience that distinguished the firm in the marketplace?’’ His response was they had that covered. They would hire back senior engineers as consultants as needed. If I was a stockholder, I would have been appalled with the idea of simultaneously paying out retirement benefits, generous exit packages and high consulting fees, while losing the resident capability that made the company great. My firm and I refused to support the idea.

To no one’s surprise, the company went ahead with the plan any way. The company beat the street’s year-end expectations… executives got hefty bonuses. Big headlines appeared in the Wall Street Journal a few days later; the company leadership was praised for their leadership. Most importantly, the company was bought up by a competitor in a fire sale less than two years later. Truly a long-term victim of corporate bulimia: risk-aversion and “chop-chop, cut-cut” leadership!

So what is a better way? Is it possible to be profitable now and for the long haul? What does a sustainable profitability culture look like? It starts off with leadership that gives purpose to organizational effort while inspiring willing effort to support that purpose! Part Two will cover some specifics.

Part Two

What to Do About It

All attempts to improve performance for the short and medium/long-haul must start with a vision of what is wanted AND what good performance looks like, and NOT just fixing what is not working! By only fixing what is not working will most likely fail to get us what we do want. We need to focus on what we do want.

The best way to cut the cord on “chop-chop cut-cut leadership” as the solution is to understand what real leadership is all about. I am writing about the kind of understanding that is internalized, thought through and fully embraced. Far too many of us quickly dismiss a lot of what I am going to say as kind of obvious, but, based on my years of experience, I know that is not really so.

1. Define leadership’s Purpose

Let’s start off with a working definition of leadership. Leadership is all about giving purpose to group effort, while inspiring willing effort to support that purpose.

The power of this definition, besides being field- tested in hundreds of situations, is that it works at two levels. (1) It provides a universal definition, which all stakeholders can understand; and (2) if properly conceived, can inspire employees, who represent a company’s greatest assets/costs, to give that extra effort when the times get tough and the enterprise is on the line. If properly conceived and implemented, it greatly helps minimize grousing about the nominal leadership, and greatly increases efficiency.

Not all people of title are leaders and not all people without title are not leaders. This applies to any individual who attempts to give purpose to what a group of individuals are doing. Without a working definition, just about any thing that is in the mind of everyone in the group will get in the way of progress of any sort.

Here are a few tips on what is required to “give purpose to group effort”.

2. Define the industry or industry segment your company/operation is part of.

Talk about stating the obvious but so many companies don’t ever really do this. If they did, we would not have the following missed opportunities or failures by otherwise great firms:

  • In the middle of the twentieth century, the Swiss watch industry owned over 80% of the world’s watch market. Their CEH (Centre Electronique Horloger) research lab dismissed the first digital watches because they had no mainspring…a critical element of how they defined a watch. They were really in the time keeping ibusiness and not the mainspring business. Their failure led to the current situation of having an 18.4% share of the world watch market, and no patent ownership of the quartz/digital technology as well.
  • Chester Carlson invented photocopying in 1938. Among other things, the technology uses mirrors and illumination. From 1939 to 1944, he approached over twenty companies to sell his invention. Two of them were Kodak and GE. Kodak recognized the importance of mirrors in his invention, but it failed to see how it fit within their model of photography. GE, on the other hand, understood the importance of illumination to his invention, but they defined themselves as being in the light bulb business. By 1948, Carlson joined forces with business partners to create XEROX .
  • The train industry is the classic example. For decades, they saw themselves as being in the train business and not the transportation business. Hence, they lost significant commercial transport business to the trucking industry. It was not until the late 1950’s that they created the standardized steel Intermodal container, which started to reverse the trend.
  • Edwin Land founded Polaroid in 1937 as an instant film camera company. The importance of that description became an organizational roadblock to embracing the digital revolution. Hence Polaroid, once one of America’s photography industry giants, failed to leap from instant film to “digital photography”.

There are many other examples. No matter how your organization defines itself, there is an ongoing need to reflect/define/redefine the industry/industry segment it operates in, and make this definition an integral part of the organization’s Vision/operational Mission.

3. Understand the Difference between Efficiency and Effectiveness

There is an obsession today with operational efficiency. I believe it is a byproduct of the obsession with MBA education, which is mostly about efficiency modeling. Efficiency is the creation of a system which optimizes performance within a single element of the business. Of course this is a good thing in theory, because it ideally eliminates waste and redirects all activities in one direction, which sounds like our definition of leadership. It is not! It rarely if ever tests the underlying purpose of the enterprise, and usually encourages the attainment of profitable numbers as its real goal. Efficiency needs to have a purpose within a higher order of things.

Primarily focusing on organizational efficiency is like a sports team having the drafting of the most accomplished player(s) at each position as its main success formula. The results are likely to lead to individual players earning a number of personal achievement awards, but the team is less likely to win the big prize. The reason is quite simple: teams need to play as more than a collection of high performing individuals, but rather as a collection of individuals inspired to achieve a common purpose especially when the going gets tough. What they should be looking for is seamless handoffs, self sacrifice for the greater good, and running plays that take advantage of optimal team performance.

For more on this, take a look at Henry Mintzberg’s controversial though highly respected 2004 book, “Managers Not MBA’s”. In this book, Mintzberg, a much respected leadership and business scholar, writes at length about how just about all MBA programs focus on efficiency within silos. MBA programs generally provide high degrees of useful knowledge in operational efficiency, but that is not the only thing that is needed within organizations. What is needed to stop the “chop-chop cut-cut leadership” cycle, most often given in the name of efficiency, is true operational effectiveness. The difference between efficiency and effectiveness is what, the late-great organizational theorist, Russel Ackof, described as the difference between knowledge and wisdom. That is because organizational effectiveness focuses on institutional purpose and links all the “silos”into an integrated whole. To make this happen, both technical and human organizational effectiveness are needed. This combination will lead to superior product quality, greater competitiveness in the marketplace, better delivery systems, and a greater likelihood of achieving objectives.

There are several universities I am familiar with that try to get the efficiency/effectiveness balance right. They are Mintzberg’s programs at both INSEAD (in France) and McGill University (in Montreal), the University of Toronto’s new Institute for Management & Innovation (IMI), and the University of Guelph’s Master in Leadership program, which is designed around organizational effectiveness principles of cross-functional collaboration and alignment with the organization’s stated vision and goals. The latter program ideally should be paired with the knowledge derived from an MBA program, while the former university programs have more of an integrated efficiency-effectiveness design.

4. Put in Place Performance Management Systems, Based on Both Organizational Effectiveness AND Efficiency

Performance management is all about defining and tracking what good looks like within the organization. Once leadership’s purpose is clearly defined, an organization can align its technical and people systems to that purpose.

On the technical side, there are:

  • enterprise resource planning (ERP) systems,
  • enterprise planning systems, and
  • customer relationship management software.

Enterprise systems (ES) are built on software platforms. Examples are Oracle’s Fusion and SAP’a NetWeaver.

On the hardware side, , enterprise systems are the servers, storage and associated software that large businesses use as the foundation for their IT infrastructure. They manage large volumes of critical data, and provide high levels of transaction performance and data security. More well known ES vendors are HP, IBM, Oracle among others.

At least as important as integrated ES systems are the integrated people systems. These have to do with:

  • Recruitment systems
  • People development systems
  • Recognition and reward systems
  • Promotion systems
  • Succession Systems
  • Communications systems

Once technical ES systems are in place, it is too easy not to “spend the money” required for integrated people systems. Beyond this, organizations which subscribe to the “Chop-Chop Cut-Cut Leadership” model will argue either that they have these elements in place already or they are not part of their core business model. My years of Organizational Effectiveness experience tell me that in most cases, these and other popular objections are based on a lack of what Russell Ackof, called organizational wisdom. The answers to the following questions should provide an insight into the effectiveness of an organization’s performance management system:

Are the stated goals of the organization part of the organization’s definition of the leadership’s purpose, which is most often found in the vision of what is wanted AND what good performance looks like? If not, why?

What were recent promotions primarily based on? Did it appear as if these promotions were based on the stated goals of the organization? Were you inspired to go the extra distance to support the goals on the organization as a result of this process?

Are those who are held up as examples of what “good looks like” fundamentally represent the stated purpose of the organization, or are they primarily models of something else? Why?

Everyone knows that an organization which has two sets of financial books is probably up to something unsavory, and puts its future at risk. An organization which has both a stated and unstated understanding of what good people-performance looks like also puts its future at risk because succession is a key part of its performance management system.

If you are particularly intrigued by the topics covered in this article, please contact me to find out how you / your organization can find out more.

Meaningful Reflections!

Dr. William (Bill) DeMarco

A Dialogue on Leadership & Nationhood

Posted October 14th, 2014 in Culture, Leadership by Dr. William (Bill} DeMarco

                     A Dialogue On Leadership & Nationhood
                                                  by
                                     Dr. Bill DeMarco


One of the defining moments in a society’s history is when it comes to terms with the issue of “why and how we govern”. In most countries, such defining moments are immortalized in historical documents, national holidays, artistic renderings, symbols of nationhood, and codes of law. There are no right or wrong answers to the question of “why and how we govern”. That is because the “correct” answer in each case is culturally dependent. If we define culture as “the sum of the history, folklore, and values that, taken together, make up the unique identity of a society at a given point in time” (DeMarco, 2003), we can begin to appreciate the complexity of answering such a simple question. The values describe what a society stands for, while the folklore looks at the symbols and stories that best embody those values. The history is the kaleidoscope of people, events, and institutions that help frame the culture. With all of this as living subtext in the great debate around “why and how we govern”, participants in the great drama of nation building debate issues of governance structure: federation…confederation…monarchy… republic… parliament… chambers of government…and the all important “who has the right to participate in decision making?”. Ultimately, the debate focuses on the culturally dependent governing principle: who, how, and why we serve. This is where issues of “governing and the governed” reside. The “debate” always takes place, but sometimes it is not as explicit as it needs to be!
As challenges to the governing construct emerge, societies revisit their governing principles. History is replete with examples of such challenges: the Anarchist Movements in Europe and North America in the 19th and early 20th centuries… the post WWI Red Scares…post WWII Cold War…the post WWII end of Colonialism…civil disobedience and Civil Rights movement in the U.S. in the 1960’s and 1970’s…the 1960-1970 FLQ challenge to Canadian sovereignty…the Basque Separatist movement in Spain…the Irish Nationalist Movement…the Sinn Fein—Ulster Unionist confrontations in Northern Ireland…China’s “Great Proletarian Cultural Revolution”…and, of course, September 11th (2001) to name just a few examples. In each case, societies looked at “who, how, and why we serve”. In each case, the answers to the seminal question of “who, how and why we serve” led to structural reforms. These reforms were usually led by leaders who may not always have been right, but were always single- minded of purpose. They acted in service of the values they believed were core to their respective cultures.

Robert Harris’s painting depicting the 1867 Meeting of the Delegates of British North America, also known as The Fathers of (Canadian) Confederation

At this time of year, citizens in many jurisdictions have an opportunity to celebrate their nationhood by participating in the voting process. Rarely, if ever, are we asked to put our lives on the line for this privilege.  That is reserved for those noble souls who engaged in the great debate of such big issues as “why and how we govern” and “who, why, and how we serve”. Unfortunately far too many of us trivialize the process by engaging in mundane banter over entitlement and personal interests, if we engage at all, It is time for societies to once again engage in the great debate of nationhood.  We seem to have lost our way.  As Tip O’Neil, the late, great Speaker of the U.S. House of Representatives, famously said time and again: “All politics is local!”.  Now is time for all citizens to again engage in the great debate about “why and how we govern”. This debate needs to start with each of us at the local level. It is our right and our responsibility to do so!

Enhancing Corporate Governance & The Role of H R

Posted September 23rd, 2014 in Business Culture, Culture & Leadership, Succession Planning, Team Building, Uncategorized by Dr. William (Bill} DeMarco

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NOTE: A number of colleagues and former MBA students have recently asked for the following article of mine.  I thought there may be some interest in a wider audience.  While the date goes back a decade, I believe the content is still very relevant and worth a new read.  Meaningful Reflections.  Bill 

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25th McMaster World Congress

Enhancing Corporate Governance & The Role of H R

Hamilton, Ontario, Canada
January 14-16, 2004

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Rethinking the Role of HR in a Post-Enron World

Lessons from the Trenches

By:
William M. DeMarco, Ph.D.

Abstract

Global improvements in corporate governance bear remarkable similarities concerning board makeup, ethical behavior in high places and the differentiated roles/responsibilities of the board and CEO relative to disclosure obligations, auditing, financial reporting, and investor protection. There is fairly universal agreement that the board, as representative of the shareholders, and the CEO, as leader of the management team, collectively set the direction of the corporation, each in their differentiated roles. In so doing, they jointly define what good looks like for all the world to see. This paper looks back at the role of HR over the past two decades, what it needs to do differently to optimize its contribution to good corporate governance, and some lessons learned during a twenty five year career of linking HR and organizational performance to corporate goals.

Key Words:

Competency Model
Corporate Communications
Executive Development
Incentive Compensation
Leadership Development
Management Development
Organizational Development
Organizational Effectiveness
Performance Management
Succession Planning

Biographical Notes

William M. DeMarco, Ph.D.

Dr. William DeMarco is a Management Consultant & HR Executive, expert in the creation & leadership of high performing organizations. During a consulting career of over twenty-five years, he has provided Leadership Development, Strategic HR, and Organizational Development expertise to major corporations on three continents. Dr. DeMarco has also authored more than seventy company-specific Organizational Effectiveness Reports, Organizational Culture Studies, Strategies, and Strategy Implementation Programs for some of the most respected global corporations. He has appeared on CNN International, and the Bloomberg Business Radio Network. He has also been keynote speaker at executive conferences in Canada, Europe, Japan, Southeast Asia, and the United States. In addition to maintaining an active consulting schedule, he teaches advanced-level MBA courses at the Michael G. DeGroote School of Business. He holds a Ph.D. from Boston College.

Introduction
The drive towards improved corporate governance guidelines and performance is truly global [1]. Local laws and customs notwithstanding, improvements in corporate governance bear remarkable similarities concerning board makeup, ethical behavior in high places and the differentiated roles/responsibilities of the board and CEO relative to disclosure obligations, auditing, financial reporting, and investor protection. In almost all cases, there is also an emphasis on executive and non-executive director development relative to their role(s). This latter emphasis heavily focuses on statutory, environmental, and social responsibilities. Part of this responsibility also includes assuring the continuity of the enterprise through oversight regarding the selection, development, and monitoring of executive successor candidates.

Irrespective of the nuanced differences, one jurisdiction to the other, there is fairly universal agreement that the board, as representative of the shareholders, and the CEO, as leader of the management team, collectively set the direction of the corporation, each in their differentiated roles. In so doing, they jointly define what good looks like for all the world to see.

Value Proposition
This paper is derived from twenty-five years consulting and executive experience. While very little in this paper is new [2], its message is particularly relevant to the post-Enron corporate governance world. It is based on the value proposition that HR is entrusted with optimizing people performance relative to all aspects of what good looks like, as defined by the board and CEO…AND that success is determined by results based on how well all HR policies, practices, and procedures interact while serving the goals of the enterprise, not by how finely crafted these are taken separately. This paper will be presented in three phases: (1) broad brush twenty year retrospective on what HR has contributed to the corporate bottom line; (2) high-level recommendations for enhanced HR contributions; and (3) some lessons learned from the trenches. All three phases will be presented from a corporate governance frame of reference.

I. HR Retrospective

The primary responsibilities of most corporate human resource departments over the past two decades have increasingly focused on the people-side of mergers, downsizing and outsourcing activities. With corporations more and more focusing on doing what it takes this week…this month…this quarter to contain costs to more successfully compete globally, HR professionals have been preoccupied with doing the work demanded by executive stakeholders. So what has happened to HR as a result?

From where I sit, it looks like training departments have been decimated, outsourced, or refocused. The bums in the seats model which defined training success in unenlightened organizations of the past has become an all too commonplace model of training “excellence” today. Great corporations, once known for their outstanding internal training capabilities, have all too frequently depleted their capabilities through outsourcing or rightsizing. The reasoning frequently went this way: We are getting back to our core business…outsourcing will cut our overhead, while providing us with capability on an as-needed basis. Stock holders loved it…have you met many stock holders these days who do not support cost savings above all else! Analysts gave high marks for such “sound managerial insight”. Some even call this “true leadership”. Performance systems, such as recruitment, performance management programs, and succession planning have also gone through dramatic change, each in its own way. Internal recruitment departments are relatively scarce now, with most of the capability being outsourced on a just-in-time basis. As a result, both external recruitment and temporary employee firms have exponentially increased in size. Human resource professionals spend much of their recruitment time dealing with these firms. The corporate position usually supports this shift in how recruitment is done because it theoretically keeps fixed costs down [3]. Of course this is a hit with analysts and stockholders, as are performance management programs which don’t take too much time to complete. The expression I frequently hear is that a performance management program is a good concept, but it shouldn’t take employees away from doing their real jobs! Regarding succession planning, it is still not done well in most organizations. Sure, many ask managers who is the most qualified to replace them, but that is hardly a class A farm system! It is akin to asking every player on the starting line-up in a competitive sport who is most qualified to replace you. There are so many competing and contradictory interests in such an exercise, it is hardly worth the effort! It is no wonder that corporate governance guidelines universally call for improvements in succession planning.

Where has the Social Compact gone?
Compensation departments have spent most of the decade creating broad bands to accommodate a flatter organization model, with fewer promotion options. Earlier in the past decade, most organizations became obsessed with competitive compensation studies. Execs wanted to know how their salary bands stacked up relative to the competition [4]. Middle of the pack was good enough for most. The value of outsourcing hit home in the latter half of the decade when valued technology jobs could be performed in India for ten cents on the dollar. These were no longer the blue collar or hourly jobs of textile manufacturers or auto assembly lines. It was not a quantum leap for people in authority to ask If these jobs could be sent offshore, and done so well for so little, why do we even need so many broad salary bands domestically. Analysts and stockholders saw the wisdom of the new way, and are looking forward to more cost savings!

Benefits departments have remained busy in an area which has fundamentally changed since the late 1980’s. Over the past ten years, much of their time has been committed to creating/administering exit packages and early outs. Additionally, the overwhelming majority of organizations have gone from Defined Benefit to Defined Contribution models. Employees were frequently told that they were being given more choice. Initially positioned as providing employees more opportunity through a variety of benefits options, corporations quickly decreased their contributions to as little as possible. This left employees with higher personal premiums and fewer company contributions. Many organizations which previously differentiated themselves through their comprehensive benefits package failed to replace lost benefits with some other element of the social compact which employees value. Analysts and stockholders alike cheered the shift to defined contribution as a way of gaining control over run-away costs.

Have these changes been good for organizations?

During a management consulting career of nearly twenty five years, I have seen many changes in the business environment in general, and the human resource profession in particular. What is happening now is radical and far reaching. I’m not sure much of it is sound! In spite of public pronouncements to the contrary, most corporations treat human resources as commodities, rather than the intellectual capital of the firm. Even terms like human capital (the consequences of investments in human competence) are frequently expressed but rarely utilized to their full potential. I fear that this is all part of the short term obsession that seems to run most organizations. Short term focus at the expense of long term development is a form of corporate bulimia. Taken too far, organizations run the risk of purging so much that nothing of value is left.

Of course, some firms have the balance just right. However, far too many have gone too far. A few years ago, I was asked by an executive-level committee of a major aerospace company to comment on a proposed solution to a significant short-term cash crunch. The suggestion was simple enough: early out for all employees over fifty-two years of age. After getting past the initial shock, I asked: does a thirty year veteran have more competitively significant knowledge than a twenty year veteran? The EVP answered: definitely, but we can bring him back as a consultant! If it was my company, I would have found the solution far too costly in terms of lost competitive capability and real long term dollars. The problem was they had already gotten so lean, they had very little left to sell to survive. They went ahead with the plan, sans my unnecessary endorsement. A once venerable firm was bought up in a fire sale a year later. Unfortunately, this is not a unique situation.

A longer-term view is only part of what’s needed. Many other issues need to be addressed as well. For example, changes in corporate governance requirements in Canada, the U.S., and elsewhere, are a step in the right direction. Medium and long term incentives for senior executives [5] are also desperately needed as well. The fact that the challenges have gotten greater only enhances the need for change! While none of these are HR issues directly, they greatly impact the ability of HR professionals to go from survival to making a difference.

II. RECOMMENDATIONS

Understanding the direction

For the human resource professional, translating company direction into an actionable human resource plan can provide the company with a maximum return on its human resource investment, if designed and implemented properly. For example, most companies invest their training dollars in courses that, at face value, sound like wise investments. No matter how good the course may be, however, if it is not tied directly to the company’s direction, it should be offered only after all areas critical to the strategy are mastered. Human resource professionals need to separate strategic dollars from discretionary dollars. With few exceptions, human resource professionals who want to really make a difference need to think beyond the way things have been done in the past. Real solutions lie in growing the business; planning is an integral part of the future.

Human resource planning is only the beginning of the success formula. The successful human resource professional is one who knows how to translate the plan into action, and does it. Given how our society traditionally, rewards short-term performance over longer-term strategic thinking, the human resource professional will need to create new ways to contribute to organizational effectiveness. Two areas worth looking at to illustrate the “new way” are succession planning and compensation. They are also an integral part of most new corporate governance guidelines.

Translating the plan

Traditionally, succession planning, where it does exist, has been a bailiwick of historical documentation or cloning of incumbent management. In the first instance, there is little correlation between a person’s biological age, number of years in the current position, years with the company, and the ability to successfully perform the tasks of the next level of management. In the second instance, there are no assurances that the incumbent is the perfect candidate for the existing job and that the existing job’s requirements are identical to those necessary to meet the company’s future goals. Would it not be a wiser investment of the human resource professional’s time and budget to discover the roles of the ideal manager of the future, given the company’s direction and what it will take to get the managers at all levels ready for the future? [6]

In the area of compensation, human resource professionals should take a leadership role. Simply administering “the plan” does not accomplish this. At the very least, human resource professionals should provide a context for tying incentive plans to overall strategic goals[7]. They should make certain everyone in their organization knows the difference between longevity awards and true incentive plans, and acts accordingly. As people who most appreciate issues of human motivation, human resource professionals should leverage the total compensation plan toward the company’s strategic goals.

Meeting the challenge

In the process of linking performance to goals, nothing should be left to chance. Communications [8] must require that people always say what they mean and mean what they say. Compensation should be based on a real pay-for-performance system. Recruitment and promotion schemes can provide maximum benefit if they are fundamentally based on a company’s strategic needs. Labor relations need to be dramatically redirected toward the company’s goals. Having earned the right to the executive suite in the past two decades through their significant contributions to mostly short-term corporate needs, most of today’s human resource professionals need to play a more proactive leadership role in helping build the business. The top HR role needs to be focused on corporate development, in addition to HR administration. A very few companies have even created a Chief Development Officer position.

III. LESSONS LEARNED

I have had the good fortune of working with some executives and HR professionals who’s work in this area I greatly admire. Many others were more of a “work in progress”. In all cases, however, there were lessons to be learned. While presented in no
particular order, I do believe each lesson presented below has significant relevance to linking people and organizational performance to company goals in the post-Enron corporate governance world.

Lesson One: HR success is determined by how well each and every part interacts while serving the goals of the corporation, not by how finely crafted the parts are taken separately!

HR, like all other functions within the corporation, is a sub-system of a larger fully integrated operating system. No corporate function by itself has all the elements of the entire operating system…corporate success is more dependent on how well each of its parts work together than by how outstanding any one part may be. For HR that means all its activities need to be fully focused on and integrated with where the corporation wants to go. Cross functional partnerships, and internal HR collaboration need to be the norm, not the exception. Anything less, likely builds territoriality [9], bureaucracy, and dysfunctionality…not to say anything about being just plain ineffective!

Lesson Two: Don’t confuse process improvements with real progress!

There is a difference between doing things right and doing the right things. We need to avoid confusing process improvements with real progress. Process improvements such as ERP, Strategy Mapping, Balanced Scorecard, and HRIS are great enablers. Progress comes from doing the right things with these enablers, not just building even world class processes! Boards and CEO’s want results[10]. Managers at all levels need to be cautious not to be seduced by the allure of technology. HR should work closely with managers at all levels to make certain sound enablers are developed and used. They should also monitor progress against goals to facilitate staying on track.

Lesson Three: Focus on What You Want …not what you don’t want!

In both the planning and implementation phases of process improvement, there is a tendency to focus heavily on getting rid of what we don’t want [11]. That may come from not having a clear organizational/departmental destination in mind, or a lack of understanding concerning what it will take to get there. Under the circumstances, getting rid of this isn’t it can look awfully attractive…People in general have a compelling need to feel like they are accomplishing something meaningful. The bottom line is the destination must be clear and actionable, otherwise we may become the enforcement police rather than the development enablers that the organization truly needs.

Some years ago, I worked with the CEO and executive management team of a major general insurance company. After more than a century in business, the company felt it was time to transition from a mutual to stock company model. They believed this new structure would position them to better address the changing needs of the marketplace. The regulatory implications of the transition, such as new reserve requirements, were carefully scrutinized, and planned for. On the people side, the company focused on converting employees into true believers in the benefits of Profitability…a concept that is anathema to a mutual company! So they focused employees on getting rid of much of the oversight functions like one-over and two-over approval signatures, because they viewed them as bureaucratic and counter-cultural to a profit-driven organization. The company ended up with people working fewer hours, ineffective cost containment, and too many people doing discretionary rather than strategic activities to fill up their time. They certainly didn’t end up with enhanced profitability! I guess they failed to remember the lesson of the Wizard of OZ: You won’t necessarily get back to Kansas, Dorothy, by not going to Oz.…You have to take the yellow brick road.

Lesson Four: Answer the Fundamental Questions of the Enterprise

The most important questions any organization can ask itself are: What is the purpose of the company? and For whom does it exist? The answers are not self-evident. They are culture, ownership and leadership-dependent [12]. Answering these questions, however, makes it possible to define what success and good (organizational, managerial, employee) performance look like. Without these definitions, organizations typically fail to create appropriate development policies/programs, typically defaulting to bottom line numbers, which are results, not goals unto themselves. Additionally, HR should make certain that all employees understand what they get paid to do, and how it fits within the bigger picture. This enhances the likelihood that the company will perform effectively as well as efficiently, what Russell Akoff called [13] the difference between wisdom and knowledge.

Lesson Five: Corporate thriving requires growth…Cost cutting by itself is only a placebo!

Corporate thriving requires growth at multiple levels ( employee, institutional, brand) Cost cutting by itself is only a placebo that looks and feels like growth, but is really a prescription to shrinking capability, shrinking markets, shrinking brand loyalty, and shrinking profits.

Human resource professionals are entrusted with the care and well being of the most fragile and valuable corporate resource of all. It is marginally renewable. Linking all people performance policies, practices, and procedures, including workforce development, to company goals would contribute to true corporate growth. As imperfect as the models might be, they need to build a business case for linking strategic investments in people with improved corporate performance. As if this challenge were not enough, overcoming countless challenges like silos, territoriality, survival tactics, inadequate sponsorship, traditionalism, etc., will likely be required as well. Those HR professionals and executives already in the forefront of this change know just how difficult this process can be. But it is a road worth traveling if companies are to thrive.

Lesson Six: The shortest distance between two points is not always a straight line

Translating corporate goals into organizational and people performance has many challenges, not the least of which is defining how to get to the destination in a way that makes the most business sense. Unless an organization is facing bankruptcy or being packaged for a fire sale, leaders at all levels need to craft a plan which is both attainable and reflects the capabilities and needs of all stakeholders. The plan must reflect the concept of employee and organizational stretch, because stretch enhances capability and determination. Using stretch properly, however, requires caution so stretch never fractures. While boards want results, they are generally open to well thought out implementation plans which are both aggressive and realistic. Executives and managers I have seen do this best are those who use stretch when developing short, medium, and long term plans…they are always open to mid-course corrections. HR can play an important role here by making certain that both the culture and capabilities [14] of the organization and its people are well documented and known by all in decision-making roles.

Lesson Seven: Keep a sharp eye out for High Potentials…You’ll find them in the most surprising of places

Executive succession planning is an integral part of sound corporate governance. Successful execution of executive succession planning programs depends on many things, not the least of which is its feeder system (i.e. manager/supervisor level successor lists). Executives (and managers) should always be on the lookout for high potential talent. They should not be afraid to use their intuition (ability to make good decisions based on incomplete information) to identify high potential talent. Intuition succeeds most when the goals are crystal clear, and the critical behaviors (competencies) required to get there are known. HR could play a pivotal role in creating an appropriate, company-specific competency model [15]. This model, however, is just one more enabler. Executives and managers at all levels need to get out, meet with employees… engage in discussions about where the company is going and how each employee can contribute… all the while applying the competency model.

As if speaking for so many fine executives I have known, Jack Welch wrote: During our field visits, we often “discover” three or four stars in every business and excitedly think up new opportunities for them. When we finally get to this wrap-up meeting, we inevitably find that we’ve slotted each new “star” in at least three to five different jobs.[16] Focus on finding high potentials. Each organization has them. Look high and low. You’ll be surprised at what and who you will find!

Lesson Eight: Beware of the “We’re different…Can’t be done Here” Syndrome

There is no doubt that each organization is distinctive. The mix of corporate history, culture, values, climate and people is unique. It is almost as if each corporation has its own fingerprint! There is a trap in taking this too far, however. No company is so unique that it would not benefit from the application of time-tested and highly validated organizational development best practices.[17] The uniqueness comes into play not so much in what needs to be done to achieve company goals, but in the best way to proceed, given the culture. Falling into the can’t be done here syndrome deprives the organization of critical creativity and leadership in a rapidly changing world. On the other hand, adapting organizational development best practices to local needs and conditions keeps the organization moving towards its goals.

I have seen far too many companies run into a brick wall in the face of best practices that could be successfully applied to their own environment. One of the major challenges executives and managers face is to define both the what and the how. Failing to learn from the experiences of peers in other companies/industries deprives corporations of insight and valuable time, two precious commodities in today’s global business environment.

Closing Comments

At the 2002 Second International Conference on Corporate Governance in New Delhi [18], the delegates issued twenty-two recommendations. Recommendation eleven states: A primary goal of good corporate governance ought to be to foster a culture of creativity, innovation and entrepreneurship to protect the business from irrelevance and obsolescence. It should aid to leverage the intellectual capital to serve…customers and …markets.

I passionately believe that linking HR policies, practices, and procedures to company goals is a must have. Done right, it leverages intellectual capital by transforming HR investments from discretionary niceties to strategic imperatives. While corporate governance has been viewed as having very little if anything to do with HR, a new paradigm is emerging. HR integration has long been an HR best practice. It is now also becoming a governance requirement. Today’s global corporate governance challenge is directed at HR executives as well as the rest of the executive management team. For the HR executive of a public company, the emerging role is clear: provide reinvigorated and expanded leadership in areas of historic HR responsibility, or run the risk of having that responsibility go elsewhere!

Notes

1. The European Corporate Governance Institute provides links to corporate governance guideline sites for nearly fifty countries. See: www.ecgi.org/codes/all_codes.htm

2. For a discussion of the author’s early 1990’s views on the HR professional’s emerging role in optimizing contributions to the corporate bottom line, see: Foreword by DeMarco, W. [1992], HR Policies Handbook, Boston, Warren Gorman-Lamont.

See Goleman, D., Boyatzis, R., and McKee [2002], Primal Leadership, Boston, HBS Press, pp.15-18, for the results of an interesting study on how improved employee performance shows up on the corporate bottom line. This partly flies in the face of current logic for outsourcing activities such as recruitment and training/development.

4. In Drucker,P., Managing for the Future [1992], Oxford, Butterworth-Heinemann, Ltd., p.134, Peter Drucker weighs in on the subject when he writes: “…we need policies that compensate people for performance rather than for rank – to the point were ten years hence we may routinely pay a top-flight professional more than the manager to whom he or she reports, just as we pay a football star more than we pay the coach.

5. For an interesting alternative to executive compensation based on short term results, see Kanter, R.M.(1983), The Change Masters, New York: Simon and Schuster, pp.366-367.

See Braksick, L.W. [2000], Unlock Behavior, Unleash Profits, New York, McGraw-Hill, for a detailed presentation of what it takes to get managers at all levels ready for the future.

One of the “Key Recommendations” of the Conference Board Commission on Public Trust and Private Enterprise states Performance-based compensation tied to specific goals can be a powerful and effective tool to advance the business interests of the corporation. See The Conference Board Commission on Public Trust and Private Enterprise: Executive Summary of Findings and Recommendations [September 17, 2002], p.6.

8. Chester Barnard is considered by many as an important early twentieth century management theorist. Given that he was also president of New Jersey Bell, his ideas can have a particular corporate governance resonance with executives. He championed the notion that a major part of an executive’s responsibility was to both nurture and communicate the values and goals of the organization. A collection of his speeches can be found in: Barnard, C. [1968], The Functions of the Executive, Boston, Harvard University Press.

9. For a detailed description of the debilitating affect of silos and defensive routines on individual and corporate performance, see Argyris, C [1986], Strategy, Change, and Defensive Routines, Harper Business. Also see Argyris, C. [1990] Overcoming Organizational Defenses: Facilitating Organizational Learning, Allyn & Bacon, and Kanter, R.M., ibid., pp.80-82.

10. Ulrich,D., Zenger,J. and Smallwood,N. [1999], Results-Based Leadership, Boston, Harvard Business School Press, provides a balanced and well documented assessment of what it takes to get results. There is a particularly good overview of the use of competency models in leadership development on pages1-26.

11. In his recent autobiography, Jack Welch of GE fame, said much the same thing when he wrote: …I always pounded home the question: ‘Are we measuring and rewarding the specific behavior we want?’ By not aligning measurements and rewards, you often get what you’re not looking for.. Welch, J. [2001], Jack: Straight from the Gut, New York, Warner Business Books, p.387.

See: Mehra, M., [2002], Improving Quality of Corporate Governance, www.scfcg.net/art13.htm for a comparative analysis of priorities for stakeholders in Japan and the United States. The author also supports the notion that answering these two questions is critical to corporate success.

13. Keynote Speech, Akoff, R. [1992] World Deming Quality Conference, Denver.

14. See Braksick, L.W. [2000], ibid., pp.29-54, for a discussion of how to best align what the author calls pinpoints to goals for maximum results. Also of particular value to both consultant/practitioner and executive alike is Schein, E.H. [1999], The Corporate Culture Survival Guide, San Francisco, Jossey-Bass. Also worth noting is the classic work on the topic: Schein, E.H. [1985], Organizational Culture and Leadership, San Francisco, Jossey-Bass.

See DeMarco, W. [1992], Quality Management Survey, Tokyo, Japan Management Association, for a comparative study of Japanese and American managerial high performance competencies. Also, refer to Goleman, et al., [2002], ibid., pp. 253-256, for a more recent list of generic high performance competencies.

Welch, J. [2002], ibid., p. 379.

17. For a global perspective on organizational development best practices, refer to Adler, N.J. [1997], International Dimensions of Organizational Behavior, Cincinnati, South-Western University Publishing. Also of value as a reference resource is Sikes, W., Drexler, A.,and Gant, J. [1989], The Emerging Practice of Organizational Development, Alexandria (Virginia), NTL and San Diego, University Associates.

18. See www.wcfcg.net/recommendations.htm