Published in the San Diego Union-Tribune, December 7, 2015
I remain fascinated by how people make decisions. And along those lines I want to explore and possibly debunk the economic theory of enlightened self-interest. The basic theory argues that shareholders, managers and employees come first in building the business design of a company and its management.
However, we all know about 2008. “I made a mistake in presuming that the self-interest of organizations, specifically banks, would be best capable of protecting their own shareholders,” said Alan Greenspan, former chairman of the Federal Reserve Bank, when he testified before Congress.
The banks blew themselves up and several hundred thousand employees along with them. I will not spend any time on who should be prosecuted – that is for another time. But I am interested in why this enlightened self-interest principle failed so miserably and what should replace it.
And for that, I turn to Robert Simons, a Harvard Business School professor. He has written a lengthy paper on the subject, but his main premise is that the dominating organizing principle of managers (and entrepreneurs) should be to focus on “the four C’s – competition, customers, commitment and controls.”
Today, the salary ratio of the top chief executive officers to the average employee in the organization is about 300-to-1. In other words, the hierarchy in a typical public company has different self-interests than the average worker. In a startup, this imbalance is subtler – think founder stock vs. employee stock options later after the company grows. But an enlightened entrepreneur still tries to align all interests in the company.
(Note: I am suspect when an entrepreneur comes in and tells me that he owns more than 80 percent of the stock. That suggests that he is not thinking holistically about how to build and retain a whole team.)
I do not view sharing as a moral obligation. Rather, I view it as a rational choice for creating personal wealth. So, the puzzle is how to balance the human characteristic of self-interest with the equal recognition that I cannot do it alone. You can’t lead if no one is behind you following. All of us have an inherent and well-defined sense of equity and fairness.
So Simon says the four C’s are actually in our own, best self-interest.
Competition: Andy Grove, CEO of Intel, said it best in his book, “Only the Paranoid Survive.” He elaborates, “I worry about competitors, I worry about other people figuring out how to do what we do better or cheaper.”
Every entrepreneur knows the famous four quadrants slide about the competition. Spend time on that one.
Customers: Peter Drucker is quoted as saying, “The purpose of business is to create a customer.” And our old pal, Jack Welch, said it in his elegant blunt style, “Shareholder value is the dumbest idea in the world – it is a result, not a strategy. Your main constituencies are your employees, your customers and your products.”
Commitment: This idea takes as its underlying premise putting the collective ahead of the self. It means, I am there for you, baby, 24-7. And not just an individual but a whole company – its core values need to be centered on commitment to the customer.
(Note: Southwest Airlines is one of the paragons in this field. Ironically, the company puts its employees first, and they in turn put the customer first. Basically brilliant.)
Controls: This is critical and it is trampled on daily. Finance, big pharma, energy – you name it, they do not do very well (they do lousy) in “self-regulation.” Under the guise of shareholder value, they act in ways that are not transparent, and when the proverbial stuff hits the fan, they are always surprised and only mildly apologetic.
And Simons explains why. He says that people do not typically act on temptations, unless there is one additional ingredient – the ability to rationalize their behavior. The manager says to himself, “I will never get caught, everybody else does it, I’m doing it for the good of the company – after all, it will increase shareholder value.” And that, my friend, is the full circle on its way to hell.
The entrepreneur needs to declare certain behaviors off-limits, he needs to build a shared mission (and the associated wealth to go with it) and he needs to see that his self-interest is actually not just closely aligned with, but also rather congruent with, the customer. All hail the customer.
Neil Senturia, a serial entrepreneur who invests in early-stage technology companies, writes weekly about entrepreneurship in San Diego. Please email ideas to Neil at [email protected].
Rule No. 446
“Let our Union be touched … by the better angels of our nature.”
– Abraham Lincoln