By Dov Seidman
It’s time to look deeper than quarterly reports when you decide where to invest.
We’ve been under the impression that business was operating in a separate sphere from society. If we could create that separate sphere, it would make sense to focus on recent earnings and profits. Think of the famous line from The Godfather: “It’s not personal, it’s strictly business.” So if things were that neat and tidy, just about traditional business transactions, then corporate profits and earnings would be perfectly rational measures of success. I’d use them to make my investment decisions, too.
But we can’t create that perfect, separate universe for business. Things are messy, and they’re going to stay messy. Every day, more evidence piles up to prove our world is interdependent. Markets are prone to unpredictable human behavior, violent economic swings, powerful natural disasters, sudden commodity shortages and crippling cyber outages. The “private sector” is inextricably linked to a host of factors outside of its traditional realm. Even though the business world is messy and complex, many still expect CEOs and boards to lead, structure and govern public companies as if business were still buffered from the rest of society. What we really need, though, is to rethink our approach to evaluating business health and potential.
The need for a new lens to view and make investment decisions in business is evident throughout the company and in all of its relationships with employees, customers, investors, and communities in which it operates. Profits feel increasingly difficult to eke out despite access to new markets. Risk management has proven inadequate.
When deciding where to invest, look beyond a company or fund’s financial performance over the last few quarters. Look at its behavior. In this interdependent world with complicated relationships that cross traditional boundaries, the companies with a competitive edge are those who thoughtfully engage with society, create trusting relationships with suppliers and customers, and earn loyal investors.
Companies that are poised for success in the 21st century are those who are on a journey, who recognize that a long-term vision can require short-term setbacks. They are the ones that are poised to reach new heights, by deliberately developing a core set of values that will help them become inspiring leaders who leverage the potential of their employees and behave well in society at large. They rigorously live those values, using them to shape management strategy and employee behaviors. They are the worthwhile investment choices.
Does this sound like a departure from the usual investment advice you receive? That’s because it is. When I wrote my book How: Why How We Do Anything Means Everything, it was based on the premise that values-based behavior pays off. To survive unpredictable markets, companies and leaders must rethink strategy, looking beyond stop-gap measures to sustainable solutions. In fact, I stated, there exists a host of concrete, fact-based, effective and transformative actions leaders can take to engage employees, delight customers, increase average employee tenures, boost innovation and ultimately increase revenue while strengthening resiliency.
Now, we’ve proven the HOW thesis. Groundbreaking independent research delivers compelling data on how our organizations really work to create financial and social value for investors, executives and employees. The results presented in The HOW Report are derived from a rigorous statistical analysis of 2 million observations from 36,000-plus employees in 18 countries, from the C-Suite to the junior ranks. It was developed by my company LRN and independently conducted by the Boston Research Group, in collaboration with Research Data Technology and The Center for Effective Organizations at the University of Southern California.
The research examined how governance, culture and leadership influence behavior and impact performance. We’ve got good news and bad news to share. The good news is that the findings of The HOW Report prove that companies truly built on purpose, guided by values and permeated with trust experience significant advantages over the competition.
More than 90% of respondents at self-governing organizations said their companies performed better financially than their competitors; fewer than half of respondents at strict, top-down organizations claimed the same.
Here’s the bad news: only 3% of the companies surveyed meet the criteria for self-governance. That means that the vast majority of businesses still operate in a manner that does not encourage mission and values-based engagement from their employees.
These HOW Metrics provide a wonderful window into the strategies that actually work to get sustainable, long-term results for companies. As you invest, don’t simply rely on a social investment fund that may only screen out companies with bad records on human rights or other issues. Look further, for companies that align with our new world through long-term strategies for success that rely on their most important source of capital: human capital.
Look to businesses like office furniture manufacturer Steelcase, which is using its 100-year anniversary as an opportunity to do some soul-searching. Steelcase is looking way out into the future, developing a 100-year plan at a time when it has become increasingly difficult to manage on a one-year basis, let alone according to a five-year plan. What’s more, Steelcase is conducting this exercise after an arduous and successful journey to transform itself into a global company whose mission extends well beyond its products. Marking the centennial, Steelcase CEO Jim Hackett said: “We’re human-centered as a culture, and therefore human-centered as a business…our customers turn to Steelcase not just because of what we make, but because of what we know. We create products and services, but our customers buy insights and innovation.”
Discover companies like Unilever, which is on a 10-year journey to align its work with the interests of society – and to elevate humanity. The company grounding this mission in specific targets – to cut its environmental impact in half while doubling revenues in the next decade. Meanwhile, Unilever is still reporting earnings to its shareholders, but has cut back on the details with greatly abbreviated quarterly reports, to avoid getting mired in the short term.
Not all visions are created equal. Once you identify companies that are journeying, evaluate their plans. Key to success is a strategy that systematically focuses on improving culture and behavior in a rigorous way. This strategy must be based in principles and mission, intentionally putting leadership and resources into building a culture that develops the next generation of good leaders, rather than relying on a search firm to bring in a hero to “fix” a sick company’s problems. The model I’ve laid out is one that truly maps to our new, messy world where business and society are inextricably linked.
As global interdependencies grow even more intertwined, shareholders can play an important role in determining our global future. Interdependencies are tricky, and in order to avoid becoming codependent, we all must consciously align ourselves with employers, political leaders, and investments that share our values. Only then can we reap the dividends of this new 21st century world.
Dov Seidman's professional career has focused on how companies and their people can operate in both a principled and profitable way. Seidman is the author of How: Why HOW We Do Anything Means Everything published by Wiley & Sons in an Expanded Edition in September 2011 with a Foreword by President Bill Clinton and a new preface. Seidman is also the founder and CEO of LRN. Since 1994, LRN has helped hundreds of companies simultaneously navigate complex legal and regulatory environments and foster ethical cultures. Seidman is a Harvard Law School graduate who also earned a bachelor's and master's degree in moral philosophy from UCLA and a BA with honors in philosophy, politics, and economics from Oxford University.