Yet capitalism does not have to be a static concept. It can change for the better, and in the face of social upheaval these days, many are insisting that it must. Perhaps our emphasis on innovative measurement in business could be a big part of broader solutions that teaches valuable lessons about how business does, and does not, respond to change.
In a democracy, the economy serves the public, and if the system does not achieve public goals, it deserves reform. And today there is a growing sense that reform is needed. During a period of unprecedented prosperity here in the United States (as measured by unemployment or GDP), real wages for the least educated have barely moved. Now, you may think that levels of inequality are the product of a “rigged system,” or just the reality of meritocracy and competition, but regardless they are an unsatisfactory outcome from a societal viewpoint. Aside from social stress, prosperity isn’t very prosperous if half the population doesn’t see personal progress.
Business leaders have responded by calling for “responsible capitalism” or “stakeholder capitalism” – models that suggest we need different objectives for the corporation, perhaps even alternatives to the profit motive. They hint that profit comes at the cost of social good. But is that necessarily true? I would contend that what corporations and their investors really need are better ways to measure the performance of business that demonstrate the connection between good business practices and good profits.
OK, I’ll grant you “measurement” is not a particularly sexy topic. You were hoping for something a bit more prescriptive, perhaps? Maybe even definitive: Let’s regulate the outcomes we seek!
But prescription or regulation tend to be less effective than incentives in market economies, and what we need is leverage, which comes from millions of independent decision makers moving in the right direction. Yes, measurement is sexy in markets.
The argument for “stakeholder” or “responsible” capitalism by and large comes down to the same thing: There is a right way to achieve profits, and a wrong way. We imagine the former to be a business model that rewards employees appropriately, protects the environment, works to correct inequality in our society and provides equal opportunity. And that is just my wishlist – you probably have your own. “Responsible” capitalism, its proponents imply, requires monitoring and balancing several outcomes, including profit, environmental impact, social impact and others.
But that can create both legal and practical conflicts that are conveniently overlooked but massive in ramification. Ironically, it can create incentives for management to spend corporate resources selfishly or inefficiently and risks cronyism and bias. When the owners or enterprise, the shareholders, lose faith in management protecting their interests, value usually gets destroyed and not just for the shareholders but for society overall.
Still, if we don’t love the results of today’s seemingly profit obsessed business, and alternative goals have their own drawbacks, how do we change? To paraphrase the old joke, if capitalism is hurting, you just aren’t doing it right.
Consider this: the widespread popularity of NPS is driven by a belief that doing the right thing by your customers actually drives profits, if you measure it the right way. Based on that simple idea, thousands of boards, management teams and leaders have adopted NPS as a measurement, often with teeth – accountability and compensation. In other words, massive leverage for good profits.
Now, we know that businesses with high NPS outperform their peers in terms of growth and profits, the two most significant variables in stock price valuation. We also know that employee alignment matters; companies with the right culture, right engagement of employees find positive linkage with both NPS and profitability. In other words, all three of these variables tend to occur in high stock performance companies. Doing right by employees and customers is not just, or even primarily a moral imperative; it’s really good business.
Better yet, we know that customers and employees want to associate themselves with ethical businesses. That means more than “don’t be a crook” these days, it means doing right by all those stakeholder groups we started with. Sure, someone still chooses to work for those robo-calling “scam the aged” companies, but I’d suggest that they aren’t exactly talent magnets.
On this point, one final observation is worthy of note: The “transmission mechanisms” that makes high levels of employee engagement impact profitability and growth often flows through customer outcomes anyway. Engaged employees drive customer outcomes drive financials.
It would seem that in market economies, all roads to profit tend to lead through employees and customers. And many of our socially desirably outcomes are what both groups want. Is the profit motive really at odds with a better society?
Maybe we should ask: if this is such an obvious alignment, why is it not happening already?
First, to be effective as a measurement for investors, a given metric needs to be accepted as de facto or de jure. In practice, that means that either the government comes in and defines it, or everyone agrees on a standard because it just works in practice. Generally, it seems the public markets prefer the former, which is why Rob Markey of Bain & Company makes a compelling case for FASB (Financial Accounting Standards Board) to force standardization around customer reporting. Doing so, he argues, would build more reliable, transparent metrics, and would be taken seriously by investors as a driver of profit.
That’s true, but might not happen, or even be needed. Private investors, wall street analysts and boards of directors all have a strong, profit-driven interest in better metrics. Transparency would convince employees, customers and the public that the company was sincere in its efforts and enable calibration of progress. Many private investors – the oft-maligned venture capitalists and private equity firms – have figured out that any new metric that provides a glimpse into productivity or future growth – is worth the effort. And worth the effort to do it right; understand the measurements, refine the calculations and hold management accountable for both accuracy and performance. They demand transparency, because they understand that measurement without transparency is like unrequited love: You can cry yourself to sleep at night, but nobody notices.
Now, I am not suggesting that we come up with some kind of “community adjusted EBITDA” like WeWork attempted. There is a big difference between providing investors with forward-looking insights versus inventing new metrics to give a falsely positive impression of your performance. The former is referred to as “transparency” whereas the technical term for the latter is “bonkers.”
The market can drive consensus around metrics that work, metrics that link to financial outcomes. The challenge is one of corporate governance. For many leaders and boards, innovation around measurement has not caught up with the modern corporation.
As an example, as NPS has been adopted for management compensation by many of the world’s largest corporations, boards and CFOs both find themselves in an unfamiliar territory, that of non-financial, nonstandard metrics that matter. It is just not sufficient to post scores that are not fully understood and too many metrics cited on earnings calls don’t withstand even superficial scrutiny. Leadership needs to do the work of understanding the critical metrics they rely on and building the right measurements. The same lessons apply to a raft of innovative measurement that link socially desirable outcomes to profitable performance, such as employee population diversity.
If the path to a better society runs partly through enterprises, we should understand better what makes enterprises work. Profit is not necessarily in conflict with responsible business and thinking that way might cause as many problems as it solves. Rather, let’s better equip leadership to finding paths to higher profitability and growth and show, with data, that responsible business is good, profitable business.