The Business Roundtable Manifesto: What Should CEOs Do?
Last week there was a lot of press about the Business Roundtable’s new manifesto, proclaiming that business’s role is to help all of society, not just shareholders. While it reads well, it’s no different from the book Conscious Capitalism, Liberating The Heroic Spirit of Business, written in 2013.
But that aside, this is the theme of the day, so let’s talk about it. CEOs really are worried about these issues, and it’s largely because the world has changed.
As The Economist stated in the article “What are companies for?”
The CEOs’ motives are tactical. They hope to pre-empt attacks on big business from the left of the Democratic Party. But the shift is also part of an upheaval in attitudes towards business happening on both sides of the Atlantic. Younger staff want to work for firms that take a stand on the moral and political questions of the day. Politicians of various hues want firms to bring jobs and investment home.
I think the issue is far deeper.
The research I did at Deloitte in 2018 and 2019 found that “social impact” is now 50% more important than customer impact, and CEOs now realize that employees are as important as customers.
As one of my clients put it well, “I worry about employees first and customers second, because I know if I take care of employees, they will take care of our customers.”
I think the real reason this shift has happened is that employees (and consumers) have woken up. Today more than a third of employees simply will not work for a company that does not align with their social values, and customers won’t do business with companies that don’t worry about the environment.
Unilever, a company I’ve worked with for years, started to understand this years ago and in my most recent discussions with their head of consumer insights, the company essentially said that their new strategy is one of “inclusive, sustainable growth.” In other words, growth alone is not a strategy. If the company cannot grow in a way that is positive for each local community in which it does business, they will not pursue the strategy.
This theme makes Unilever very conscious of local water and environmental issues, standards of living in each community it serves, its local brand and language, and ways to hire and promote local employees, despite their educational background. By its very nature, Unilever has been wired this way for generations.
For Unilever, and companies who think this way in their soul, HR topics like inclusion, diversity, transparency, and culture are business strategies, not HR programs. They have understood that building a company that itself is a “good society” results in growth and profits for shareholders.
As we’ve learned decade after decade, when you do the right thing, staying true to your mission, profits are an outcome, not a goal. The relentless pursuit of profit, while exciting, always leads to sacrifices over time. (Witness Enron, BP, Volkswagen, and many others.)
What Should Companies Do?
Well given the popular trend in “making companies more human” (I always laugh about this latest catch-phrase, they’ve been “human” for all the 40+ years I’ve been working), what should CEOs and HR leaders do?
Let me give you some concrete, measurable examples – and we should hold our executives to these standards.
1/ Invest in people, during good times and bad.
The first thing to say is “wages and benefits are an investment, not an expense.” People are one of the only appreciating assets we have in business, and when we continually think about “minimizing labor costs” we think the wrong way. (Read this article about why I think wages are lagging that dives into this topic.)
Nearly every company is worried about skills and learning right now, so let’s put our money where our mouth is. The average company spends around $1300 a year on employee development (ranging from $200 per year in retail to $4,000 per year in professional services). That is a tiny fraction of wages (around 1-1.5%). Make this a steady investment and protect it even during bad times. (The SEC is now looking at new reporting that may help us change this.)
Every time we have a recession I get a barrage of companies calling me to ask “how do we cost-justify our L&D investments?” And many essentially shut down or starve employee development. This is not “acting as a human company.” Every employee needs continuous development all the time. I would like to see companies lock these budgets and see them included as investments in the balance sheet and income statement.
This may mean restructuring, transforming, or vitalizing your entire learning culture. It’s doable and good business in the long run, and this falls on management, not just HR.
2/ Make fairness and inclusion a business imperative.
HR professionals really understand this issue. The CEO can’t just wake up one day and say “lets run a report on gender pay equity and see where we are.” You have to hold yourself accountable to such standards every day.
Again, think about your company as a “society” in itself. If people are left out, underpaid, or discriminated against, you’re operating with an ill society. People are not giving you their best, your meritocracy isn’t working, and employee grumbling is holding you back.
I’m not saying this is an easy thing to do – it takes lots of inspection, reporting, training, and effort. Chevron, a company which prides itself on inclusion, holds diversity councils that inspect all people decisions any manager can make. Let’s see if the Business Roundtable CEOs start reporting on pay equity, hiring and promotion equity, and other fairness topics in public.
It was only in April (a few months ago) that representative Katie Porter called out Jamie Dimon for underpaying JP Morgan Chase employees in public. It’s embarrassing to watch the testimony, because it shows how little he had really thought about the issue. Let’s see if he wants to appear in congress on this issue in the months ahead.
Which reminds me of the CEO Pay Ratio. Today, thanks to new disclosure laws in the US, we know that the average CEO makes 144 times the pay of the average worker, and CEO pay went up by 7% last year. (Average wages went up by about 2.9%).
Note that while consumer and retailers have the highest levels of inequity, even tech CEO’s make about 140 times their average worker. Is this “Fair?”
3/ Stop penalizing employees for being in the wrong place at the wrong time.
One of the most damaging and difficult thing that happens in business is a restructuring, downsizing, or other business transformation. This is going on all the time in big companies. What happens to the individuals who happen to be working in these business units?
As most of you know, it really depends. In many cases, everyone in the “affected” area is left to fend for themselves, creating a “have or have-not” situation. Well-run companies carefully help employees move or reskill to another location, and forward-thinking companies like AT&T encourage employees to reskill themselves.
An even better and more interesting option is to create an internal talent marketplace, as companies like Schneider Electric and others are doing. Get rid of the organizational silos we typically have in companies (salespeople NEVER go into marketing, and people in business NEVER go into HR), and make internal mobility a part of your strategy, not an afterthought.
In the last study I did we found that almost 2/3 of employees believe “it’s easier to find a new job outside the company than it is inside the company.” This has to change. One CHRO told me “the best way to be promoted in our company is to quit and get hired back into a new job.” Obviously, this is ridiculous, and we can focus on fixing it.
Improving career management is now one of the hottest topics in HR, by the way, and we have a lot of good ideas to share.
4/ Make serious efforts to support the community.
I have to mention the Amazon HQ2 fiasco here. Somehow Amazon (I don’t talk with Amazon at all, but I pick up stories from ex-employees) managed to convince dozens of cities (who have enormous financial problems of their own) to lavish tax breaks on Amazon to “attract them” to their towns. Obviously, this is not a strategy to support local communities.
(Read Scott Galloway’s scathing article on this topic.)
I actually believe one of the best things CEOs could do would be to “pay more taxes.” Taxes, as bad as they sound, are the only way we can truly contribute to our communities through a public process. Of course the political process is messy, ugly, and hard to manage – but when companies do everything to avoid or reduce their taxes, I have to wonder if they really do care about the country.
(I know that is a very controversial statement, but I’m throwing it out there anyway.)
Beyond paying taxes, there are issues like giving employees time to contribute to local causes, moving work to locations that reduce commute, and trying to solve issues of housing prices, water, and other environmental problems in the country. Decades ago Unilever built “company towns” designed to help employees live better in their communities. Thinking about where and how people live is another area companies can help.
5/ Be more generous with wages.
Remember Henry Ford’s decision to double hourly wages in 1913? It was not only to increase buying power among his customers, it was also a financial decision to reduce labor costs. He realized, as I’ve seen many times, that underpaying people increased turnover, training expense, and manufacturing errors.
My guess is that pay practices in your company are pretty standard. Among all the talent and HR practices I’ve studied over the years, compensation practices are perhaps the most reluctant to be changed. In our last study of this area, only 12% of companies said: “our compensation and pay practices align with our business strategy.”
Why? Because most companies simply try to “pay at market rates” and study their peers to stay current. So wages go up very slowly, and the biggest increases we see are roughly 2-3 percent.
Interestingly, while wages have been sticky on many industries, benefits are going through the roof. The average spending on healthcare, wellbeing, insurance, and other benefits has gone from 28% to almost 35% of wages in the last twenty years, and this is simply because workers need the help.
When you pay people well the company benefits in many ways: you can hire more skilled and ambitious people; your retention and engagement go up; people are more willing to pitch in when things go bad; your employment brand is uplifted.
Just look at Costco vs. its competitors. The company pays almost 25% more than its competitors and its margins and customer service are among the highest in the retail industry. A perfect example of “good pay” turning into “good business.” (Some call this “Woke Capitalism,” a phrase that seems to inflame conservatives for some reason.)
6/ Teach leaders how to be good citizens.
The final point I’ll make is that manifesto’s and CEO mantras are all good, but they don’t really matter if line managers and leaders don’t act the same way. Companies like Microsoft have turned around their entire business by teaching managers the concepts of the “Growth Mindset.” In today’s world of business, every supervisor, manager, and leader is a “sponsor” of the company mission – so we need to give them the tools and support to do this well.
Do you have a strong first line leadership development program? Do you regularly communicate with leaders about ethical issues and strategies for tradeoffs at work? Do you tell stories about how to “make the right choice” when confronted with business problems that push against social issues? Do leaders know how to listen to complaints and deal with fairness and diversity?
These are all “non-business” topics that have to be part of the leadership culture, and it’s up to CEOs to hold people accountable. When a company experiences an ethical lapse, bad behavior, or other mistake in public, the CEO should take accountability and realize that it’s his or her job to make sure such actions don’t happen again.
CEOs: We Are In The Era of Trust
As I’ve written about many times this year, the paradigm for corporate leadership has changed. Businesses are the most trusted entities in our lives today (almost 50% more trusted than political institutions), so employees and customers are expecting us to do more. Yes, we have to make a profit, but over the long run that just is not enough.
I always liked the way Yvon Chouinard, the founder of Patagonia describes their culture. Patagonia is “a mission disguised as a business,” essentially here to save the planet. This mission permeates every business strategy they have, and it has helped the company stay true and grow for years.
An interesting and very important idea is Elizabeth Warren’s proposed “Accountable Capitalism Act.” This is proposed legislation that will force companies to sign a Federal charter to operate in an inclusive way. It also empowers workers to select board members and changes stock sales and other compensation rules. I like a lot of its ideas, focused on making corporations good citizens.
By the way, while none of us wants more legislation, it does level the playing field and forces all companies to act. The current economy encourages “some companies do good” and other companies just “do well.” We want all companies to “do good to do well.”
Let’s Measure The Economy In A Human Way
One more important point I want to make. For the last few years, we’ve measured the “success” of our economy by looking at the unemployment rate, GDP growth, and overall corporate profits. As a long-term capitalist who has spent 25 years in HR, I’m now reaching the conclusion that economists have it wrong.
The real success of an economy is not overall growth, it’s the steady increase in the standard of living for all citizens in the country. Right now a large percentage of the world is seeing their standard of living decline. So they’re questioning all the “top-down” economic speak.
While macro-economics teach us all about GDP growth, employment, and consumer demand – it means nothing if a high percentage of people cannot make ends meet. Part of what is happening is a total redefinition of how we measure the economy: moving beyond aggregate numbers and looking at the financial health of everyone.
I, for one, have been very fortunate in my life. But I don’t want to live in a country where CEOs and some of us do well, while the rest of us struggle to get by. While the Business Roundtable is certainly far from a socialist organization, their words reflect a shift: one where business leaders now realize they have to make life better for everyone.
I”m optimistic that the Business Roundtable manifesto is real.
Let’s hold ourselves accountable and see what happens next.