Business Schools Have It Backwards. Companies Survive Longer When They Put Employees First.

Maximizing profits over the short term typically undermines the viability of a company over the long term.

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By David Sloan Wilson

A groundbreaking new study1 suggests that companies need to offer a fair deal to their employees to survive. The study followed the fate of 136 companies over a five-year period, starting from the time that they initiated their public offering on the U.S. Stock market. The management practices of the companies were coded using information available from their offering prospectuses, which were publicly available. Statistically controlling for other factors, companies that placed a high value on human resources and shared profits with employees had a much higher survival rate over a five-year period than companies that treated their employees as expendable.

Actually, I’m lying. The study isn’t new. It was published in 1996 and I read about it in a book titled The Human Equation: Building Profits By Putting People First by Stanford Business School professor Jeffrey Pfeffer, which was published by Harvard Business School Press in 1998. Pfeffer combines this study with a mountain of other evidence to show that investing in employees is a sound long-term business strategy.

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Anyone who is capable of being swayed by evidence should be convinced by the case that Pfeffer has assembled. He is a highly regarded professor at one of America’s most prestigious business schools. His book was published by the most prestigious business press and has had 17 years for its influence to spread. Even if Pfeffer had never written his book, you’d think that the survival of the fittest companies would insure the spread of management practices that put people first.

But none of that happened. Putting people first has not become the norm in the business world and treating employees as chattel is perversely spreading worldwide like a cancer. Something is driving the cultural evolution of management practices that overrides experience, scientific evidence, logic, and common sense.  At least three factors lead to this perverse outcome.

The story: Religious zealots are famously immune to experience, scientific evidence, logic and common sense. The religious story that has been planted in their heads is so captivating that it drives the behavior of the true believer, no matter what the consequences. In fact, the typical response to failure is to redouble one’s faith. The power of story is by no means restricted to religion. The dominant economic narrative, with its imaginary Homo economicus and frictionless market, is as detached from reality as any religion, as the theologian Harvey Cox perceptively observed in an Atlantic Monthly article titled The Market as God, which is even more relevant today than when it was published in 1990.  Perverse business practices with ruinous consequences make sense to the economic true believer. If they fail, then the solution is to practice them even more assiduously. The only solution to this problem is to break the spell by changing the story to one that is more in tune with reality.

Short-term gains: Wouldn’t it be wonderful if short-term gains always resulted in long-term gains? Unfortunately, that is wishful thinking. Maximizing profits over the short term typically undermines the viability of a company over the long term. An ounce of common sense should be enough to reveal the folly of basing business decisions on quarterly or annual earnings, but not for the economic true believer.

Who benefits? If perverse business practices were ruinous for everyone, they would quickly be abandoned, but they typically benefit the elite, who are also in the strongest position to perpetuate the story that works so well for them. It is important to stress that those who gain from ruinous business practices might not be motivated by self-interest. They might believe to the depth of their souls that they are working for the common good. Business practices need to be judged by their consequences, even when the underlying intentions are well meaning.

It is clear from Pfeffer’s book that the key to putting people first is not to compile more evidence but to change the story to one more attuned to reality, so that experience, scientific evidence, logic, and common sense can shine through. Others have also called for changing the story, including Pfeffer himself and David Korten, author of When Corporations Rule the World,  in his new book titled Change the Story, Change the Future: A Living Economy for a Living Earth. Here is how we can succeed in the future, even if previous efforts have failed.

1) Insist on a strong theoretical framework. The dominant economic story rests upon a theoretical foundation that is extraordinarily weak. This is sometimes difficult to detect, because absurd assumptions about human nature and economic systems are hidden behind a thick wall of mathematical formalism that most people can’t penetrate and therefore accept on faith. It’s not enough to reject a story based on the absurdity of its assumptions, however. There must also be another story based on better assumptions to accept. That story is now much more fully developed than when Pfeffer’s book was published. It is based on a combination of evolutionary theory and complexity theory and it does a much better job of justifying putting people first and guarding against perverse business practices than received economic wisdom filtered through business school courses. In short, the first step toward changing the story is to insist on reasonable assumptions about human nature and economic systems.

2) Insist on empirical evidence. A single business is a complex system, not to speak of a multi-business economy.  A business strategy that seems to make sense based on an underlying rationale, such as cutting costs by paying the lowest possible wage or claiming the right to dismiss employees at will, can easily backfire based on unforeseen consequences. Rigorously designed studies are required to track all of the consequences of any given business practice.  Such studies exist and many more have accumulated since Pfeffer’s compilation, but most businesses have not adopted a culture of basing their management practices on evidence-based research. The second step toward changing the story is to demand evidence to justify any given business strategy, even one that is informed by the best theory.

3) Beware of practices that lead to short-term benefits and primarily benefit the elite.These practices might benefit the common good over the long term but they are more likely to be part of the problem. The third step toward changing the story is to demand an especially solid theoretical justification and empirical evidence for these practices—even when they appear well-intentioned.

Pfeffer’s book includes many examples of companies that experienced amazing results when they put people first. It is disappointing that his book didn’t change the story and therefore didn’t have the impact that it deserved. On the other hand, it is thrilling to contemplate the amazing results in store for businesses and economies worldwide if we can manage to change the story.

2016 March 23

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