Wednesday, December 4, 2013

A Truly Transformational Idea For Business (Organizations) and Capitalism


Much has been written and discussed the last several years about disruptive technology and disruptive ideas. Of course the astounding information and communication changes brought on in great part by the internet qualify as disruptive. The discussion and writing about transformational changes (disruptive changes) in the leadership, management and pursuit of excellence in and by companies and all organizations, though, has been greatly overstated. This paper presents our idea about this subject. We believe there is an absolute need for organizations to move toward and adopt the paradigm we present.

We admit at the start, though, that the ideas in this post qualify as letting the excellent be the enemy of the good!

Preface.

 Unleashing the local and global potential of organizations (for profit companies, non profits, governments, etc.) will create value. Fully unleashing this potential will create ultimate long term value – for each organization and the global population.  There is a functional relationship between self-interest value and other (stakeholder)-interest value.  This relationship is grounded in the highest characteristics of human nature. And properly understood and acted on, it will unleash this ultimate potential. It is philosophically sound, practically actionable and economically (commercially) optimal. Importantly, capitalism’s highest catalytic effects on value are also unleashed through this concept as capitalism’s own grounding.

Such globally respected authorities as Professor Jeffrey Sachs of Columbia University have addressed the relationship. Professors John Kotter and James Heskett of Harvard have addressed part of it. Adam Smith, in fact, clearly identified it and connected the functional relationship to the best of our human nature. So, this paper explains an idea that is the ultimate way to create value in society, locally and globally.  Others have generally touched on this idea and perhaps would agree with it, but no one has  completed the concept and put it into action.

First, A Few Brief  Comments About Some Understandable But Only Partial Efforts.

In a Harvard Business Review (HBR) article in the Jan.-Feb. 2011 issue, Professors Mark Kramer and Michael Porter of Harvard claimed that their concept of creating shared value (CSV) for business and society is or could be the next transformational idea for business in society. The concept simply says that there is much that business can do that will raise the value of the business itself by engaging in activity that also raises societal value – that many values are indeed shared.

Their idea and others mentioned below is good as far as it goes, but:

1.        It does not go far enough,

2.       It is instrumental, meaning its purpose is to expand the value pie and raise the economic      value of the business while also adding specific value to society,

3.       It is not new. Harvard colleagues, like Rosabeth Moss Kanter, have articulated similar concepts in different words, as have others:  Jim Collins in Colorado, Jerry Porras at Stanford and John Mackey and Rajendra Sisodia,  the authors of Conscious Capitalism.

4.       When the Porter/Kramer idea is presented to business leaders and others at conferences and in other forums, it creates the possibility that some will embrace and adopt their idea – allowing them to raise their firms’ value by some amount, and to participate in creating a specific value for society. But, by falling short of the truly “transformational and big idea,” there will be remaining opportunity costs that should not remain. Why? Because Professors Porter and Kramer, like so many others through the years, do a great job suggesting ways to raise the level of value from business performance in and with society - but only incrementally. And, their focus remains inward. These world class professors could embrace our concept, which would increase its likelihood of acceptance.

5.       The Conscious Capitalism and Vanguard Company concepts also go quite far in the direction of the complete idea we will present here. Our belief is that even the commendably enlightened thinking of Professor Kanter (Vanguard Companies) and of John Mackey and Professor Raj Sisodia (Conscious Capitalism) do not complete the big idea. They do not present the complete, stand-alone transformational paradigm idea. We do.

6.       Two grounding observations are important here: a. Capitalism, as we describe it here, is indeed the economic engagement model necessary for the future, and it has been widely and chronically under-utilized and misapplied; and b. Contrary to standard thinking and observation when organizational culture change is being discussed - that it is extremely difficult and takes a long time to achieve - cultures are relatively easy to change with our idea because the culture we present with our big idea is in fact an integral part of the best of human nature (seek the good, happiness, shared virtues, etc.). The cultural dimension of the idea we present includes these ubiquitous elements of our human DNA – similar to unalienable rights.

       

Ironically, Adam Smith seemed to understand and briefly explained, in his terminology, our truly big idea more than 200 years ago. Even Milton Friedman appears to have understood it a bit. However, self-focus on profit, the more the better, and focus on nothing else as long as one stays within the law (the rules), sometimes even being ethically correct if necessary, has been widely seen as not only enough over the years but more has been viewed as inappropriate. Capitalism can do so much better.

So, Professors Porter and Kramer stop short, even if they each might think they have discovered the new transformational idea. From their HBR article:

The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.”

They do have company. Such ideas as conscious capitalism and vanguard companies also stop short. Like CSV, each of these ideas has some merit and is directionally correct, but neither makes the natural jump to the breakthrough big idea. Other ideas stop short by design. They are aimed at improving processes, productivity, efficiency and effectiveness, and for achieving measurable and quantifiable results. For example, the balanced scorecard (BSC) was conceived in 1992 by Harvard professors Robert Kaplan and David Norton. It is basically an excellent measuring, motivating and unifying system. Total quality management (TQM), lean management and six sigma are other examples. These ideas each would take much more explanation to describe. They each are intended to help companies create incremental value.

      Professor Robert Kaplan, for example, summarized the balanced scorecard’s evolved purpose this way in 2010:

“After publication of the 1992 HBR article, several companies quickly adopted the

Balanced Scorecard giving us deeper and broader insights into its power and potential. During the next 15 years, as it was adopted by thousands of private, public, and nonprofit enterprises around the world, we extended and broadened the concept into a management tool for describing, communicating and implementing strategy.”

 

Another example of research and comment on the subject of businesses (organizations) pursuing excellence is the work of Professor Michael Jensen of Harvard University and the Monitor Group (a consulting firm). He addresses, in a thorough manner, the idea of “stakeholder theory” and concludes that it is flawed. He then goes on to offer his “enlightened stakeholder theory” and “enlightened value maximization” concept. Without addressing his work in detail, he simply seems not to recognize the both simple and complex functional relationship between self-interest and other-interest.

Nevertheless, let’s assume that Professor Jensen was correct about the necessity for a single value objective function. We do in fact recognize his single value objective function principle. The explanation below explicitly presents it. The decision(s) about maximum value for owners, though, is made by the owners. It might, for example, be broader for some owners than the value Jensen presents. Our idea, in addition though, recognizes the critical responsibility to know, understand and fully serve the primary valued things of each major stakeholder group. This is wonderfully doable and essential. It can be thought of, using business terminology, as breathing full life into marketing, innovation, productivity, etc. That is, the fundamentals of businesses – high quality, low prices, productivity, efficiency and yes, innovation will all be raised to their highest levels through full living of our idea in organizations.

What about family life, leisure and all other aspects of life outside the organization? That is an excellent question. With individual and organizational focus on optimizing value for primary stakeholder groups, all aspects of an individual’s life and of an organization’s life in will be at their highest levels.

 For organizational long term value maximization (net present value of future cash flows for example), the “what” question is best answered through the optimization functional relationship we present here.  This obvious answer requires the synthesizing and creative mind to be fully engaged. This paper will explain the human nature “dna” reasons that underly the axiomatically correct self-interest, other-interest transformational paradigm change that is now ready to bring us into the future.

So, there are many competent perspectives that are brought to bear on the question of maximizing organizational value, and certainly a tremendous amount of value has been created – particularly over the last 250 years. However, we still fall short of shooting our individual and collective moons.  J.

What, then, is the idea that actually does unveil the transformational paradigm change for business, all organizations and societies - local and global?

The truly transformational, paradigm-changing “big idea.”

It is presented here in brief and with dogmatic confidence. Upon reading and reflecting on it, though, one might consider it either; 1. Simply na├»ve, pollyanna-ish and dismissible, or 2. Too hard to attempt – even if one understood it.

In fact, it is just the opposite. Our big idea is elegantly straight-forward, easily understood and simple to put into practice, especially with the 21st century electronic (Internet, etc.) information and relationship models catalytically in place locally and globally. And it is morally imperative that we get on with it. Of course, the passion and aptitudes for each organization’s purpose must be in place, a need right from the start.

Here it is:

 The real breakthrough "big idea" is that self-interest value maximization is a direct function of optimization of the value provided by an organization to each of that organization's major stakeholder groups – each relative to the others. That is, when a business devotes its time, talent and treasure to doing its  best to optimize the value it provides to its major stakeholder groups (customers, employees, [and investors as a stakeholder group], suppliers, communities in which it has a presence and society [the general public interest]), it will maximize its own long-term value as an outcome (a by-product) - measured in appropriate financial terms as well as the other value measures it holds dear. This is not a belief; it is a self-evident axiom.

It can be expressed as an equation:

IVM= f (S1VO, S2VO,..… SNVO), where “I” is “institution” (any organization), “f” is “function of,” “S” is “stakeholder,” “V” is “value” and “O” is “optimization.”

This idea is the foundation axiom that can guide every organization that truly wants to maximize its value in and for society. It is philosophically precise, uniting self interest and other interest, and commercially excellent, ensuring that, with the corollaries below, it earns its opportunity to delight its stakeholders over the long run.

Note: This big (transformational) idea can, for ultimate organizational excellence purposes, be thought of as analogous to the physical “theory of everything” sought by Professor Stephen Hawking and others over the last several decades.

The corollaries for our big idea are:

1.       Universal unalienable rights (including life, liberty and the pursuit of happiness) are possessed (or yearned for) by all people everywhere.

2.       Ubiquitous global virtues, traits leading to these virtues and valued matters exist and are held dear by virtually all people around the globe. The virtues and traits (aptitudes leading to these virtues) are: Wisdom and Knowledge – curiosity, love of learning, judgment, ingenuity, social intelligence and perspective; Courage – valor, perseverance and integrity; Humanity and Love – kindness and loving, Justice; – citizenship, fairness and leadership, Temperance; – self-control, prudence and humility, Transcendence; – appreciation of beauty, gratitude, hope, spirituality, forgiveness, humor, and zest.

3.       Happiness, “the good” and the “full life well lived” are all treasured by individuals and societies – local and global.

a.       These corollaries mean that people, in their roles as markets and as stakeholders in general will be attracted to and embrace every organization that provides them with what they value as they pursue happiness. Of course, the organizations in each space that do it best will rise to the top (market share, etc.), again as a by-product.

b.      When an organization’s stakeholders see that the organization is focused on providing them the things that matter to them (their valued things), they will tend to be attracted to that organization – buy from it, sell to it, have it as a member of their community, work for it, invest in it and treasure it as in their own interest and the public interest.

4.       Fiduciary obligations exist for organizations for each of their primary stakeholder groups. That is, the fiduciary obligation is not limited to the financial dimension of an organization. To optimize the value provided to each stakeholder group relative to the others is to be fiduciarily responsible – to be an excellent steward.

5.       This functional relationship between self interest and other interest is the ultimate commercial or economic value creation axiom. It is not just a philosophical, societally nice axiom. It can result in a. the maximization of local and global economic value over the long run; and b. the basis for the good life well lived for individuals and organizations and c. the movement toward zero of local and global opportunity costs.

 

Opportunity Costs.

 

It is important here to discuss the opportunity cost concept in the context of our message.

The entire globe is virtually one marketplace now. The way a company does business certainly affects its local community and market. Now, though, it increasingly affects people and places beyond the local community and market.

The notion of opportunity costs is underappreciated in economies and societies. Simply put, if one  organization or more (or most) organizations do good or even very good at providing products or services but do not fully actualize their potential for excellence, then some value is lost to society – and to the organization itself. This part that is lost can be called an opportunity cost – a value not created and received.

NOTE: Of course, there are larger opportunity costs being incurred globally and locally. Without expanding on the matter, it is enough to mention here that national sovereignty can be retained even as our model for excellence is embraced by all organizations, including nations. Think of famine, wars, widespread disease, etc. that exist because our idea is not yet the paradigm of choice for organizations of all kinds. That is, this idea enables actualization of the potential of virtually all 7 billion people (and rising) on the planet. It can and must be pursued and achieved in order to: a. maximize local and global value; b. minimize local and global opportunity costs: and c. create the opportunity for all people to live the happy life – the full life well lived.

 

Moral Imperative.

 

If we believe there is a model for excellence in organizational behavior, as we do in this paper, then we have a moral imperative, an obligation, facing us. It is to communicate and explain the model, and help all raise their games to their highest level. By definition, the model we explain here, when fully acted out, brings us to that full actualization. So, with the “what” question being answered, the “why” question follows.

 

 Why focus on stakeholder group value optimization? The answer is, succinctly put, when we know, without question, what to do to maximize our organization’s long term value, we have a broad fiduciary obligation, a moral imperative, to get on with it. And, the delightful reality is that our organization and each of its members fully actualize our own potential as an outcome, a proper and necessary outcome.

The other main characteristics of our big idea are:

1.       The connection of self interest and other interest: Just to reinforce this part of the axiom, while it might be obvious when discussed as we do here, this functional connection is nothing more or less than putting the golden rule into robust action and following Adam Smith’s two part idea on capitalism. I am maximizing my value by optimizing the value I provide to those main persons and groups whose lives I most affect. Happiness and self-actualization are integrally related here. Note: Even if Adam Smith did not intend this connection, he should have – and I think he did.

2.       Happiness: Briefly, Aristotle’s four kinds or levels of happiness, H1 through H4 are so obviously explaining that a dominant H3 life, the happiness that flows from contributing to the happiness of and creating value for others, is ultimately the best way for one to fully actualize one’s own potential in life. It is servant existence and servant leadership in action. Our big idea is grounded in this reality – we just breathe commercial and economic meaningfulness into the idea. It fits.

 

3.       Mindset: Companies have mindsets – ways of looking at the best way to conduct themselves as  entities, in pursuit of their purposes. The primary mindsets are: a. the short-term, inward-focused and win-lose mindset; and b. the long-term, outward-focused and optimizing mindset.

Unfortunately, businesses and other organizations usually choose the former.  Or, they are forced into it. Unfortunately, this choice has been the norm over the years. It has been guided by the idea that the organization exists because of its owners and, therefore, primary focus should be on rewarding the owners. One example is the SEC quarterly report requirement for publicly held companies in the United States. Wall Street uses these reports , much of the time, as a hammer to pressure companies to behave in short term ways, and solely to reward the owners.

Our big idea is unambiguously dogmatic that the mindset must be long term, the focus must be outward and that optimizing value for stakeholders is the purpose of the organization. One outcome, in fact the fortuitous and yet necessary and natural outcome will be that the owners’ long term value will be maximized.

The Nexus between This Truly Big Value Creation Idea and Strategic Playbooks (Multi-year or Strategic Planning).

            Our big idea is the prescription for how to pursue ultimate business or organizational excellence at the philosophical and long term level. It is in perfect harmony, though, with the best practical, specific and near-term leadership, management and cultural characteristics of organizations. In fact, it creates the basis for excellence in these aspects of organizational excellence. It is in these aspects that such well known and widely adopted performance frameworks like the balanced scorecard are most helpful – they complement our value creation idea.

Here are the 21st century characteristics we mean when we discuss pursuit of organizational excellence:

1.       Threading from the organization’s charter purpose through its annual budgets exists - core ideology (purpose & beliefs), vision, mission multi-year adaptive goals, organizational goals and goals for serving each stakeholder group, strategies for achievement of each goal, annual budgets (objectives, tactics and financials), gold  standard leadership characteristics and gold standard cultural characteristics.

a.       Gold Standard Leadership Characteristics – establish direction, (vision, personal humility and professional will), modest and fearless, inclusive, enabling, inspirational, a listener, stakeholder focused – in a maniacally profound way, heart of a servant, ethical, courageous and just, and fun.

 

b.      Gold Standard Cultural Characteristics - adaptive, with a core ideology (purpose and values), risk taking, trusting, proactive, one in which all are heard and the truth is heard, reflective, humble, anticipatory and  involved, rational and respectful, a conscientious mindset, quietly confident, unassuming while maniacally pursuing the organization’s vision and mission with prudence, perseverance, humor and zest, disciplined people, thoughts and actions in a fun and dynamic environment, open, supportive and enthusiastic, happy, in a stakeholder-centered (H3) way, and fun.

 

These all fit with and are integrally related to the organizational excellence elements described above. Organizations must: a. have a core ideology (purpose and values/beliefs); b. have the correct dominant mindset (long term, outward-focused and optimizing); c. appreciate that “fiduciary”  means an obligation to excellently care for that which each of its main stakeholder groups entrust to it; d. embrace the ubiquitous human characteristics people around the globe share (unalienable rights, virtues and traits, and valued things); and e. know that the ultimate achievement of maximum value for every institution (organization) reflects the fact that virtually all people also seek the good and happiness.

Where Do We Go From Here?

We cannot help but notice that the CSV concept is being presented at conferences and related forums around the world, at a substantial fee for participants. That is fine. The Conscious Capitalism concept is available in books for interested leaders, managers and others to purchase, consider and go from there. The other concepts we mentioned are being made available as well, and it is all good and fine.

However, because we contend that, as meritorious and well intended as they each might be, they are only partial loaves, they stop short, or at best are narrowly focused. They do not pierce the membrane that leads to ultimate organizational excellence and highest value creation.

We believe we do, with our idea.  Through the 21st century transformational, paradigm-changing actionable big idea we present here, organizations of all kinds can embrace the full-life-well-lived, fully actualized potential they each and all really should want to pursue and achieve. To strive for less is to fail – no matter how well they might believe they have done.

The gigantic but tragic irony is that by not embracing and acting out our big idea, each organization, local and global economies, nations and the entire globe will fail to maximize the likelihood that the stakeholders they each serve will receive optimal value and that the organizations themselves will maximize their own long term value as well.

So, this big idea must be embraced and acted out. It is a societal and economic moral imperative for the new millennium.