Last week, Business Roundtable issued new guidance on the role of corporations, as it has periodically since 1978. This revision was significant for employee experience (EX) improvement efforts because, for the first time, employees are included as “important stakeholders” in the language. Each version of that document issued since 1997 has stated that corporations exist principally to serve their shareholders, but in addition to other significant changes, the new statement now lists: “Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.”
Perhaps predictably, politicians and the media are politicizing the announcement, while others fear that it’s a dangerous move toward socialism that will put investments in corporations at risk. But they’re missing the point.
These CEOs are embracing the idea that enterprise isn’t a zero-sum game in which one group can only win if the others lose. Instead, they’re in effect saying that long-term success will only come when multiple stakeholders win, including employees. And as many companies such as Southwest Airlines, Marriott International, and Nordstrom have already proven, focusing on enabling employees is the secret to their financial success.
First, a little historical context, if I may. Business Roundtable is an association of some 200 CEOs from the largest and best-known American companies, and its guidance on corporate governance meaningfully influences the way they run their companies and, by extension, influences our perceptions of the role of corporations in society. The notion that corporations should primarily exist to serve their shareholders is based on an interpretation of macroeconomic principles from the Chicago school of economics. Perhaps its best-known public face was Nobel Prize-winning economist Milton Friedman, who summarized his ideas in a 1970 article he wrote for The New York Times Magazine entitled “The Social Responsibility of Business is to Increase its Profits.”
In the article, Friedman argues that, for a company to serve social responsibility goals, its leaders must do so at the expense of shareholders, employees, or customers, which in his view was socialism — a powerful argument at a time when fears of the spread of communism were running rampant. But we have to remember that, in his day, Friedman did not have the benefit of 50 years of research into how investments in improving the experiences of employees relate to the long-term financial success of their organizations and, in turn, their shareholders. And since that time, the field of economics has also changed to consider human behavior and biases, thanks to another more recent Chicago-school economist and Nobel Prize winner, Richard Thaler.
We now know that 20th-century economists and business leaders shared a common limitation in their thinking: They both saw people as interchangeable parts in their models, be it economic models or business models. The models were predicated on the idea that people behave in predictable ways, which is often true when looking at large groups in aggregate, but reality is more fractal. For instance, 20th-century economic models failed to predict that rising housing costs would trigger a global economic crisis in 2008, just as 20th-century business models failed to predict that a decision to forcibly remove a passenger from an aircraft would cost an airline $1B in market cap overnight. In both cases, failing to account for the irrationality of human behavior was the key missing ingredient in the models.
We’re entering a new era of human understanding and leadership in which both governments and corporations will be motivated to develop a more complete understanding of human behavior and create environments where their people’s strengths are amplified and their weaknesses are held with compassion and understanding as they invest in helping each employee be their best — places where people can focus on the work that they’re good at and machines can focus on the work that they’re not. It’s already happening, as my colleagues J. P. Gownder and Sam Stern discuss in their recent report.
Science and our own EX Index data reveal that carefully chosen investments in improving employee experience (and not just wages) lead to greater employee engagement, which leads to better customer experience and in turn more growth and profits for shareholders. As a CIO, you have a golden opportunity to change the conversation about employee experience, raising awareness of the critical role of technology in employees’ working lives.