Helping the Chronically Overworked Find Life Balance

What Is The Impact of Short-Term Investors On Everyday Business Decisions?

Chapter 3: The Real American Idol part 10

In the last post, I discussed the values of Chick-Fil-A, a private company whose corporate values reflect the Cathy family’s interpretation of Christian values.  In his book The Loyalty Effect, Frederick Reishheld explains the impact of company ownership on its culture.  Public companies are much more prone to short term, numbers-based decision making than private ownership.  “The average public company in the United States now suffers investor churn of more than 50% per year.”[i]  In other words, half of a companies stock will be bought and sold in less than 12 months, and those owners only care about short term results since they will not be owners a year from now.

Such transient corporate owners are in a position to demand changes that increase short-term profits.  For example, layoffs and cuts to R&D spending are positive for the balance sheet, but may or may not be the correct prescription for long-term growth.[i]

It is against this headwind of numbers-based drivers that each of us in the corporate world must contend as we make decisions day to day.  Sound like a stretch?  Not to “Buzz” a former HR VP.

I came home after a layoff of hundreds and hundreds of people.  4th round.  I told my wife I feel like a collaborator in a Nazi concentration camp.  We could have made other choices, like a 15% pay cut and lay off half as many people.  ‘You can’t do that, blab la bla.’  I got sick of that moral choice of depriving people of their jobs, and being in charge of doing it.

Buzz was operating at the intersection of his people-first value system and the company imperative to save money.  I am not in a position to judge whether this cost savings was “necessary” for the survival of the company, but in many cases it is.  Layoffs are an unpleasant reality of the business world.  I think Buzz was uncomfortable because he felt they were excessive.  The answer for him was to leave that company and find another environment.  Another company may have elected to follow his preferred approach of a salary cut, as Hewlett-Packard did a few years ago.[ii]

This is a theme we will see again and again in the book – much of what happens in the corporate world is beyond your power to control.  Once you accept this, you will be in a better position to find a solution that works for you. And no, it doesn’t necessarily mean leaving the corporate world.

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[i] The Loyalty Effect:  the Hidden Force Behind Growth, Profits, and Lasting Value. By Frederick Reichheld.  Harvard business School Press (1996) p. 153

[ii] HP to cut salaries as profits decline; CEO takes hit, too. Hurd to take 20% pay cut as Hewlett-Packard looks to lower costs after weak Q1, By Patrick Thibodeau . Computerworld.com February 19, 2009. Retrieved August 14, 2012.

Chick-Fil-A’s “Golden Rule Approach To Business”

Chapter 3: The Corporation, The Real American Idol Part 9

In the previous post, I argued that companies that incorporate elements of people-first values into their culture have a competitive advantage.  In his book The Loyalty Effect, Frederick Reichheld, head of Bain Consulting’s loyalty practice, and inventor of the Net Promoter Score, has built a career showing that businesses that put people first have better financial returns, at least in certain industries.  Reishheld argues that often a loyalty culture, i.e. one that values long term relationships with employees, customers, and investors is a productive business strategy.  For example, he shows that State Farm Insurance has an advantage over its competitors because it has found ways to retain agents longer, and these older agents bring in more business[i].

Ironically (given the current controversy), The Loyalty Effect paints a very favorable view of Chick-Fil-A for its people-first values, especially with regard to the way it compensates managers and employees in a way that encourages low-turnover.  He goes so far as to say that Chick-Fil-A’s takes a “Golden Rule approach to business.” He calls the founding CEO Truett Cathy (father of current CEO Dan Cathy) “so earnest a Christian that all Chick Fil A stores are closed on Sundays which makes their financial success all the more impressive.[ii]”  I agree with Reishheld’s further observation, that being closed may be an advantage for attracting talent that doesn’t want to work 7 days a week.  I would add that because the Sunday closure is a global company rule, no one person can gain competitive advantage for putting in the extra hours on a Sunday.

Reishheld argues that the financial advantages of a loyalty culture are not universal – it depends very much on the type of industry.  “Commodity suppliers like oil companies and certain high-tech businesses where technological breakthroughs can overwhelm customer relationships are examples of companies were loyalty economics can make a difference, but probably not a decisive difference.[iii]

This resonates with me big time.  In the genomics industry, where I worked, the dollars followed the latest technology, and seemed to be largely independent of how well those companies treated either their customers or employees.  In fact, I think the technology superiority bred a certain arrogance, which came back to haunt the companies when the next technology came down the road.

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[i] The Loyalty Effect:  the Hidden Force Behind Growth, Profits, and Lasting Value. By Frederick Reichheld.  Harvard business School Press (1996) p. 127-128.

[ii] The Loyalty Effect:  the Hidden Force Behind Growth, Profits, and Lasting Value. By Frederick Reichheld.  Harvard business School Press (1996) p. 111  It is unfortunate that Cathy’s people-first values have a common shortcoming.  In his mind, they seem to apply only to certain people.

[iii] The Loyalty Effect:  the Hidden Force Behind Growth, Profits, and Lasting Value. By Frederick Reichheld.  Harvard business School Press (1996) p. 306