To borrow Jonathan Guthrie’s example drawn from The Hedgehog and the Fox by Isaiah Berlin, most Wall Street financial analysts act like hedgehogs beholden to a single defining idea rather than foxes with many — they see investments in workers as wasteful costs rather than crucial investments that will generate significant financial returns over time.
Conventional wisdom tells us that the recipe for a healthy bottom line is simple. Raise revenues, lower costs, and watch profits grow. But there’s a (not so secret) ingredient that can unlock unprecedented value for companies: corporate culture.
At least 70 percent of all employees are disengaged, which negatively impacts productivity and profitability for US companies to the tune of $550 billion per year, but it doesn’t have to. Research tells us that increasing employee engagement by 10 percent through investments in corporate culture can generate an additional $2,400 in annual profits per full-time employee. Since there are about 133 million full-time employees in the U.S., this can unlock $7.4 trillion in market cap for American businesses.1 With that market value available for the taking, why aren’t companies doing more to improve corporate culture for the sake of better employee engagement? There are several reasons, and it starts at the top:
Distorted CEO incentives
The median tenure of a CEO is less than five years, and CEO turnover hit a record high in recent years. That means CEOs want to make their money as fast as they can. This snatch and grab approach is short sighted. By leaving an immense amount of capital on the table for the immediate term, we’re shortchanging ourselves, our companies, and our broader economy for near and long term. Improving workplace culture takes time. And, unfortunately, America has shifted to an “every man for himself” culture.
In their fascinating and enlightening book, The Big Myth: How American Business Taught Us to Loathe Government and Love the Free Market, Professors Naomi Oreskes and Erik M. Conway illuminate the secret history of how of the tax-avoiding rich and corporations paid to “rent” the pedigrees and credibility of respected academics to create elegant arguments espousing the virtues of selfishness and shareholder primacy.
Undervalued employee development
The hedgehog label also applies to private equity investors, who are incentivized to treat all employees as fungible expendable expenses to be cut to generate cost savings as quickly as possible, rather than the company’s most important assets that can contribute to growth, productivity, innovation, profitability, and value creation. Time is currently viewed as the enemy of private equity investors. The result is that all spending that requires time to generate financial returns is frowned upon.
As Brendan Ballou’s book Plunder describes in detail, this type of behavior has pillaged America, ruined the lives of workers, and destroyed long-term economic value. Hedgehog business executives and private equity investors have frayed America’s social fabric and increased social instability.
The prevailing belief among hedgehog business execs and Wall Street analysts is that doing good things for workers must be bad. They either don’t understand, or completely ignore, the fact that investing in corporate culture and employee training can yield long-term financial benefits; they see investments in human capital as costly expenses rather than lucrative investments. Even as research shows that investment in training is a leading indicator of a high performing company, talent development and HR professionals’ pleas for investment in these programs are ignored by hedgehog CEOs and CFOs. That kind of short-term, blinders on, zero- sum thinking ignores research, case studies of success, and common sense.
A fox knows better. By thinking outside of the narrow perceptual framework of the hedgehog, the fox recognizes that, while it is hard to come up with an object financial metric for good corporate culture and employee engage, you can measure “unwanted” attrition and some costs of attrition. A fox also knows that it’s hard to measure the costs of low engagement and the toxicity that results, but his common sense tells him that attrition, lower productivity, and lower innovation is not good for business. The fox understands that hard or impossible-to-measure factors play into success. The enlightened leader can generate escalating value in the near and far term.
Siloed approaches
The belief that companies don’t need outside help is misguided. “We got this” is a common phrase spoken by those who are often wrong but never in doubt. Carefully selected outside experts with deep domain knowledge can turbocharge a company’s effectiveness in assessing and healing its culture. Those experts might not be found at big fancy consulting firms with freshly minted MBAs from prestigious schools. Corporate culture change requires advice from seasoned psychology, organizational design, organizational behavior experts, and former operators—all with high EQs.
Boards removed from corporate culture
Board members often have insufficient knowledge of their company’s corporate culture because they place too heavy reliance on self-reporting from company executives. Boards should get directly involved to ensure that CEOs and CFOs empower Human Resource business partners to engage outside experts to assess and diagnose workplace culture, craft prescriptions, and lead improvement initiatives. It is a breach of fiduciary duty to ignore shareholder value that can be unleashed through the additional engagement, retention, innovation, productivity, and profitability that results from good corporate culture.
Corporate culture improvement should not be entrusted to hedgehog CEOs, CFOs, and MBAs who aced their math, finance, and investments exams. Boards should instead direct that they find independent experts to assess and improve workplace culture—then calculate the company’s share of the massive $7.4 trillion financial windfall generated through higher employee engagement.
Action plan for Wall Street analysts
The next time you dial in on an earnings call, ask the CEO and CFO about their employee engagement, whether employee engagement is measured internally or through third party consultants, and how their attrition rates correspond with employee engagement metrics. That will be your first step in unleashing your part of the $7.4 trillion in hidden shareholder value.
1 Applying the S&P PE multiple of 23x to the $2,400 per full time employee ($318.24 billion), the total amount of market cap that can be created through improved corporate culture is $7.4 trillion.
Roy Swan is Head of Mission Investments at the Ford Foundation