“1
CUSTOMER EXPERIENCE MINDSET
If there’s one reason we have done better than our peers . . . it is because we have focused like a laser on customer experience.
—JEFF BEZOS
Customer experience has become a front-and-center conversation across the world. In fact, 72 percent of businesses say that improving the customer experience is their top priority. Brands that have superior customer experience bring in 5.7 times more revenue than their competitors. Customer experience is a big differentiator, and three trends are behind how this has come to be: the rise of the experience economy, a power shift from the company to the customer, and advances in technology that allow us to create more powerful customer experiences.
While price and quality are still the top considerations for consumers making a purchase decision, in one study 73 percent of respondents said that a good experience is key in influencing their brand loyalties.4 Providing an experience around a product or service is a smart investment. Companies that differentiate on experience find ways to make the customer’s life easier or better, to make the customer feel special, or to wrap a story around the product. One cannot simply throw up a product that is identical to thousands of other products and expect to be successful.
Today we live in a world where YOLO (“you only live once”) drives purchasing decisions for generation Z (born between 1998 and 2016), as well as millennials (born after 1980). Consumers increasingly value experiences over things, powering the experience economy. By 2020, generation Z will account for 40 percent of all consumers.
Part of what is driving the experience economy is the desire to curate digital lives, which you will read more about in this chapter. In one study, nearly 20 percent of generation Z respondents said they have stayed at a specific hotel or destination in order to score a positive response from followers on posts on their own social media channels. Up to 71 percent of generation Z would get a part-time job to save up for a leisure trip.
Millennials are also saving their money for interesting experiences. More than three in four millennials would choose to spend money on a desirable experience or event “over buying an attractive product, and 55 percent of millennials say they’re spending more on events and live experiences than ever before. Recent research from Dr. Thomas Gilovich suggested that people find more lasting happiness investing in experiences over buying things. The study found experiences are the glue of our social lives. Experiences enhance social relations, form a person’s identity—even a bad experience makes for a great story to share via social media.
A recent example of how this trend translates into business is LVMH—a luxury retailer we’ll talk more about later in this chapter—which recently purchased luxury travel company Belmond with plans to make traditional luxury travel less about opulent hotels and accommodations and more about one-of-a-kind experiences. They realize modern consumers care more about creating an Instagramable memory than purchasing the hottest new product. Brands like T-Mobile and Casper also are creating showrooms where customers can experience the product, make a memory, and buy something if they desire. “But how did we get here, to a time where people would rather save up for an exotic trip, participate in a compelling adventure, or learn a new skill with friends over buying a thing?
In 2008, the stock market crashed, the worst financial crisis since the Great Depression in 1933. I was living and working in New York City at the time, at a conference company, and I will never forget how quiet the streets were. Restaurants once filled with patrons were completely empty. This crisis in the subprime mortgage market in the United States became a global full-blown banking crisis with the collapse of the investment bank Lehman Brothers. The same year, an investor named Bernie Madoff—whose firm was one of the top market makers on Wall Street—was found to have operated the biggest Ponzi scheme in history, a form of fraud that gives the illusion of a sustainable business. Prosecutors estimated the size of the fraud to be almost $65 billion.
Millennials—today the largest living adult generation—were watching as their career plans were disrupted. Young people who went to school to become bankers or lawyers found the jobs had vanished. Their parents and grandparents lost their 401(k) plans or retirement savings. Young people learned that wealth could disappear in a moment’s notice.
The things that had defined their parents’ and grandparents’ lives were not going to be the main achievements of millennials’ lives. More young people opted to live in cities. Millennials opted to focus on their own aspirational dreams, putting off marriage, homeownership, and kids.
I say all this without mentioning the enormous innovation happening in tandem with these events: the internet and the proliferation of the smartphone—which armed 2.5 billion people (as of 2019) with a small computer in their pocket. People were now able to broadcast their lives online. Social media played a big role in enabling young people to create an identity online.
“This leads us to modern life, where many people choose to spend their money on experiences over things. According to McKinsey, consumers of all ages are opting for experiences, with millennials—the largest-spending group today—spending the most. Lifecasting has become a popular activity, and people curate their digital footprints with extreme focus and care. Facebook (created in 2004), YouTube (created in 2005), Twitter (created in 2006), and Instagram (created in 2010) ushered in a new era of curation and lifecasting, inspiring users to generate Instagramable content.” The smartphone, in tandem with the viral growth of these social networks, played a critical role in getting us to this inflection point today.”
“The sharing economy democratized travel, empowering more people to explore the world at better prices. Airbnb launched an offering on their platform called “experiences” to “discover things the locals do.” Airbnb advertises this offering as “activities designed and led by inspiring locals.” They immerse guests in unique worlds. Learn to bake with a famous pastry chef in Paris, take a dance class in Havana, Cuba, or get a photography lesson from an expert who will help you photograph the Sydney Opera House at sunset.
People want to feel something: they want to experience all that this world has to offer and they want to share these experiences with the world. Customer experience must be geared to this modern customer, who values experiences over things, and expects the businesses they frequent to empower and assist them as they navigate modern life.”
“THIS BRINGS US TO THE second trend driving the customer of the future: social media and the shift in power and influence from the corporation to the customer. Social media and smartphones armed customers with a platform and a microphone. Suddenly customers were talking about the experiences they were having, and companies were not prepared to engage with the customers. Companies thought social media would be a way for them to engage positively with customers, but customers expected brands on sites like Twitter and Facebook to help solve customer service issues for them. Companies were forced to engage with customers, expanding their social media teams and adding resources to serve customers on multiple channels.
Not only did customers demand companies help them with service needs, but they also had unprecedented power and an ability to share their responses to marketing campaigns. Companies faced backlash when they released ads that were perceived as racist, sexist, or offensive to groups such as veterans. Tone-deaf advertisements resulted in social media protests, and sometimes affected stock prices. Companies struggled to engage in public discourse.
The business world expected social media to empower brands, but instead customers became empowered. Nearly three-quarters of millennials report that their perception of a “brand improves when it is clear the company responds to customers’ social media inquiries. But brands were not accustomed to immediate feedback from customers (and from people on the internet who might not even be customers). Brands were required to respond and engage. Brands became more self-conscious of public opinion, now that it could travel fast and light a fire, which could bring down the company. From a customer service perspective, there has been a palpable shift in power from the brand to the customer. Social media forced brands to treat customers better, because the world was watching and they were now being held accountable.
“THE THIRD TREND THAT SHAPES the current state of customer experience is technology. In the past, customer experience technology was an “above-and-beyond” customer relationship management tool, but today having a customer relationship management tool is table stakes. Technology has empowered businesses to create efficiencies and meet the needs of a new era of demanding customers. More than half of customers actively seek to buy from the most innovative companies. We are seeing exponential growth in technology: Over the last five decades, the number of transistors (the tiny electrical components that perform basic operations) on a single chip have doubled regularly. This is the reason a modern smartphone packs incredible capability into such a small package. Connectivity has proven to be a critical aspect of modern life: Whether they’re in a rice paddy in China or on a cruise off the coast of New Zealand, people expect to be connected to the internet, and able to communicate with their family and friends. There are more than 5 billion unique mobile users in the world today, up 100 million (2 percent) in the past year. They all expect to have connectivity wherever they go.
“The cloud—which we will talk more about in chapter 6—has made data storage incredibly easy and affordable. Every company today is a technology company. Increasingly, we’re seeing companies call that out—like Allstate, an insurance company that now calls itself a data and technology company.
Technology increasingly shapes customers’ most beloved customer experiences. In a survey of 15,000 consumers, 73 percent of respondents said they value companies that offer up-to-date technology through customer experience. Technology allows companies to provide zero-friction, seamless customer experiences. Many of these companies are digital natives that deeply value the importance of digital innovation. According to Fortune, five of the top ten “most admired companies” are technology companies, including Apple, Amazon, Microsoft, Netflix, and Alphabet (Google). Most brands are reliant on a few key technology companies. Even Netflix—which competes with Amazon’s content services—relies on Amazon to host its content in the cloud through Amazon Web Services. Advances in machine learning and artificial intelligence have enabled a new era of automation, “of robots, and of personalization. Companies can do much more with data than they ever could before, not only gaining insights on the past, but also predicting the future—enabling them to better anticipate customer needs, gain real-time feedback, optimize pricing, identify customer flight risk factors, staff up or down, or make real-time marketing bets. In a 2018 survey of US senior decision-makers, big data and analytics was listed as the most important emerging technology for enhancing the customer experience.
Customers today get consumer-grade technology experiences in their personal lives, enjoying the use of social media, apps, and Apple products. Consumer-grade technology is what you experience with apps that are seamless. Customers expect the same frictionless experiences from the companies they do business with. Companies today are scrambling to digitize and are focusing on digital transformations, better leveraging technology to solve all kinds of problems with efficiencies, logistics, and supply chain. Companies are in a race to make life easier and better for customers—and they are starting by creating efficiencies for employees. “By focusing on issues like logistics and supply chain, companies are better able to get customers products faster, and create more personalized customer experiences. In chapter 7, we will look at digital transformation and how companies can do it right. A study at MIT found that companies that have embraced digital transformation are 26 percent more profitable than their peers.
Excerto de: Blake Morgan. “The Customer of the Future”. Apple Books.
Wednesday, November 6, 2019
Chap 5 - 1 Sinek
THE RESPONSIBILITY OF BUSINESS (REVISED)
Business today is subject to a dizzying rate of change. And all that change seems to be taking its toll. The time it takes before a company is forced out of the game is getting shorter and shorter. The average life of a company in the 1950s, if you recall, was just over 60 years. Today it is less than 20 years. According to a 2017 study by Credit Suisse, disruptive technology is the reason for the steep decline in company life span. However, disruptive technologies are not a new phenomenon. The credit card, the microwave oven, Bubble Wrap, Velcro, transistor radio, television, computer hard disks, solar cells, optic fiber, plastic and the microchip were all introduced in the 1950s. Save for Velcro and Bubble Wrap (which are disruptive in a completely different way), that’s a pretty good list of disruptive technologies. “Disruption” is likely not the cause of the challenge, it’s a symptom of a more insidious root cause. It is not technology that explains failure; it is less about technology, per se, and more about the leaders’ failure to envision the future of their business as the world changes around them. It is the result of shortsightedness. And shortsightedness is an inherent condition of leaders who play with a finite mindset. In fact, the rise of this kind of shortsightedness over the past 50 years can be traced back to the philosophies of a single person.
In a watershed article from 1970, Milton Friedman, the Nobel Prize–winning economist, who is considered one of the great theorists of today’s form of capitalism, laid out the foundation for the theory of shareholder primacy that is at the heart of so much finite-minded business practice today. “In a free-enterprise, private-property system,” he wrote, “a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” Indeed, Friedman insisted that “there is one and only one social responsibility of business, to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” In other words, according to Friedman, the sole purpose of business is to make money and that money belongs to shareholders. These ideas are now firmly ingrained in the zeitgeist. Today it is so generally accepted that the “owner” of a company sits at the top of the benefit food chain and that business exists solely to create wealth, that we often assume that this was always the way that the game of business was played and is the only way it can be played. Except it wasn’t . . . and it isn’t.
Friedman seemed to have a very one-dimensional view of business. And as anyone who has ever led, worked for or bought from a “business knows, business is dynamic and complicated. Which means, it is possible that, for the past 40+ years, we have been building companies with a definition of business that is actually bad for business and undermines the very system of capitalism it proclaims to embrace.
Capitalism Before Friedman”
“For a more infinite-minded alternative to Friedman’s definition of the responsibility of business, we can go back to Adam Smith. The eighteenth-century Scottish philosopher and economist is widely accepted as the father of economics and modern capitalism. “Consumption,” he wrote in The Wealth of Nations, “is the sole end and purpose of all production and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” He went on to explain, “The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it.” Put simply, the company’s interests should always be secondary to the interest of the consumer (ironically, a point Smith “believed so “self-evident,” he felt it was absurd to try to prove it, and yet here I am writing a whole book about it).
Smith, however, was not blind to our finite predilections. He recognized that “in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.” In a nutshell, Smith accepted that it was human nature for people to act to advance their own interests. He called our propensity for self-interest the “invisible hand.” He went on to theorize that because the invisible hand was a universal truth (because of our selfish motivations we all want to build strong companies), it ultimately benefits the consumer. “It is not from the benevolence of the butcher, the brewer, or the baker that we can expect our dinner, but from their regard to their own interest,” he explained. The butcher has a selfish desire to offer the best cuts of meat without regard for the brewer or the baker. And the brewer wants to make the best beer, regardless of what meat “or bread is available on the market. And the baker wants to make the tastiest loaves without any consideration for what we may put on our sandwiches. The result, Smith believed, is that we, the consumers, get the best of everything . . . at least we do if the system is balanced. However, Smith did not consider a time in which the selfishness of outside investors and an analyst community would put that system completely out of balance. He did not anticipate that an entire group of self-interested outsiders would exert massive pressure on the baker to cut costs and use cheaper ingredients in order to maximize the investors’ gains.”
“If history or 18th-century brogue-tongued philosophers are not your jam, we need simply look at how capitalism changed after the idea of shareholder supremacy took over—which only happened in the final decades of the twentieth century. Prior to the introduction of the shareholder primacy theory, the way business operated in the United States looked quite different. “By the middle of the 20th century,” said Cornell corporate law professor Lynn Stout in the documentary series Explained, “the American public corporation was proving itself one of the most effective and powerful and beneficial organizations in the world.”
“Companies of that era allowed for average Americans, not just the wealthiest, to share in the investment opportunities and enjoy good returns. Most important, “executives and directors viewed themselves as stewards or trustees of great public institutions that were supposed to serve not just the shareholders, but also bondholders, suppliers, employees and the community.” It was only after Friedman’s 1970 article that executives and directors started to see themselves as responsible to their “owners,” the shareholders, and not stewards of something bigger. The more that idea took hold in the 1980s and ’90s, the more incentive structures inside public companies and banks themselves became excessively focused on shorter-and-shorter-term gains to the benefit of fewer and fewer people. It’s during this time that the annual round of mass layoffs to meet arbitrary projections became an accepted and common strategy for the first time. Prior to the 1980s, such a practice simply didn’t exist. It was common for people to work a practical lifetime for one company. The company took care of them and they took care of the company. Trust, pride and loyalty flowed in both directions. And at the end of their careers these long-time employees would get their proverbial gold watch. I don’t think getting a gold watch is even a thing anymore. These days, we either leave or are asked to leave long before we would ever earn one.
Capitalism Abuse”
“The finite-minded form of capitalism that exists today bears little resemblance to the more infinite-minded form that inspired America’s founders (Thomas Jefferson owned all three volumes of Smith’s Wealth of Nations) and served as the bedrock for the growth of the American nation. Capitalism today is, in name only, the capitalism that Adam Smith envisioned over 200 years ago. And it looks nothing like the capitalism practiced by companies like Ford, Kodak and Sears in the late 19th and early 20th centuries, before they too fell prey to finite thinking and lost their way. What many leaders in business practice these days is more of an abuse of capitalism, or “capitalism abuse.” Like in the case of alcohol abuse, “abuse” is defined as improper use of something. To use something for a reason other than that for which it was intended. And if capitalism was intended to benefit the consumer and the leaders of companies were to be the stewards of something greater than themselves, they are not using it that way today.
“Some may say my view—that the purpose of a company is not just to make money but to pursue a Just Cause—is naïve and anticapitalist. First, I would urge us all to beware the messenger. My assumption is that those who most fiercely defend Friedman’s views on business, and many of the current and accepted business practices he inspired, are the ones who benefit most from them. But business was never just about making money. As Henry Ford said, “A business that makes nothing but money is a poor kind of business.” Companies exist to advance something—technology, quality of life or anything else with the potential to ease or enhance our lives in some way, shape or form. That people are willing to pay money for whatever a company has to offer is simply proof that they perceive or derive some value from those things. Which means the more value a company offers, the more money and the more fuel they will have for further advancements. Capitalism is about more than prosperity (measured in features and benefits, dollars and cents); it’s also about progress (measured in quality of life, technological advancements and the ability of the human race to live and work together in peace).
The constant abuse since the late 1970s has left us with a form of capitalism that is now, in fact, broken. It is a kind of bastardized capitalism that is organized to advance the interests of a few people who abuse the system for personal gain, which has done little to advance the true benefits of capitalism as a philosophy (as evidenced by anticapitalist and protectionist movements around the globe). “Indeed, the entire philosophy of shareholder primacy and Friedman’s definition of the purpose of business was promoted by investors themselves as a way to incentivize executives to prioritize and protect their finite interests above all else.
It is due in large part to Milton Friedman’s ideas, for example, that corporations started tying executive pay to short-term share price performance rather than the long-term health of the company. And those who embraced Friedman’s views rewarded themselves handsomely. The Economic Policy Institute reported that in 1978, the average CEO made approximately 30 times the average worker’s “pay. Where the average CEO has seen a nearly 950 percent increase in their earnings, the American worker, meanwhile, has seen just over 11 percent in theirs. According to the same report, average CEO pay has increased at a rate 70 percent faster than the stock market!
It doesn’t take an MBA to understand why. As Dr. Stout explains in her book, The Shareholder Value Myth, “If 80 percent of the CEO’s pay is based on what the share price is going to do next year, he or she is going to do their best to make sure that share price goes up, even if the consequences might be harmful to employees, to customers, to society, to the environment or even to the corporation itself in the long-term.” When we tie pay packages directly to stock price, it promotes practices like closing factories, keeping wages down, implementing extreme cost cutting and conducting annual rounds of layoffs—tactics that might boost the stock price in the near term, but often do damage to an organization’s ability to survive and thrive in the Infinite Game. Buybacks are another often legitimate practice that has been abused by public company executives seeking to prop up their share price. By buying back its own shares, based on the laws of supply and demand, they temporarily increase demand for their stock, which temporarily drives up the price (which temporarily makes the executives look good).
Though many of the practices used to drive up stock prices in the short term sound ethically dubious, if we look back to Friedman’s definition of the responsibility of business, we find that he leaves the door wide open for such behavior, even encourages it. Remember, his only guidance for the responsibility companies must obey is to act within the bounds of the law and “ethical custom.” I, as one observer, am struck by that awkward phrase, “ethical custom.” Why not just say “ethics”? Does ethical custom mean that if we do something frequently enough it becomes normalized and is thus no longer unethical? If so many companies use regular rounds of mass layoffs, using people’s livelihoods, to meet arbitrary projections, does that strategy then cease to be unethical? If everyone is doing it, it must be okay.
As a point of fact, laws and “ethical customs” usually come about in response to abuses, not by predicting them. In other words, they always lag behind. Based on the common interpretation of Friedman’s definition, it’s almost a requirement for companies to exploit those gaps to maximize profit until future laws and ethical customs tell them they can’t. Based on Friedman, it is their responsibility to do so!
Technology companies, like Facebook, Twitter and Google, certainly look like they are more comfortable asking for forgiveness as they run afoul of ethical customs, as opposed to leading with a fundamental view of how they safeguard one of their most important assets: our private data. Based on Friedman’s standards, they are doing exactly what they should do.
If we are using a flawed definition of business to build our companies today, then we are likely also promoting people and forming leadership teams best qualified to play by the finite rules that Friedman espoused—leadership teams that are probably the least equipped to navigate the ethical requirements necessary to avoid exploiting the system for self-gain. Built with the wrong goal in mind, these teams are more likely to make decisions that do long-term damage to the very organizations, people and communities they are supposed to be leading and protecting. As King Louis XV of France said in 1757, “Après moi le dèluge.” “After me comes the flood.” In other words, the disaster that will follow after I’m gone will be your problem, not mine. A sentiment that seems to be shared by too many finite leaders today.
The Pressure to Play with a Finite Mindset”
It’s a big open secret among the vast majority of public-company executives that the theory of shareholder primacy and the pressure Wall Street exerts on them are actually bad for business. The great folly is that despite this knowledge and their private grumblings and misgivings, they continue to defend the principle and yield to the pressure.
I am not going to waste precious ink making a drawn-out argument about the long-term impact of what happened to our country and global economies when executives bowed to those pressures. It is enough to call attention to the man-made recession of 2008, the increasing stress and insecurity too many of us feel at work and a gnawing feeling that too many of our leaders care more about themselves than they do about us. This is the great irony. The defenders of finite-minded capitalism act in a way that actually imperils the survival of the very companies from which they aim to profit. It’s as if they have decided that the best strategy to get the most cherries is to chop down the tree.
Thanks in large part to the loosening of regulations that were originally introduced to prevent banks from wielding the kind of influence and speculative tendencies that caused the Great Depression of 1929 to happen, investment banks once again wield massive amounts of power and influence. The result is obvious—Wall Street forces companies to do things they shouldn’t do and discourages them from doing things they should.
Entrepreneurs are not immune from the pressure either. In their case, there is often intense pressure to demonstrate constant, high-speed growth. To achieve that goal, or when growth slows, they turn to venture capital or private equity firms to raise money. Which sounds good in theory. Except there is a flaw in the business model of private equity that can wreak havoc with any company keen to stay in the game. For private equity and venture capital firms to make money, they have to sell. And it’s often about three to five years after they make their initial investment. A private equity firm or venture capitalist can use all the flowery, infinite game, Cause-focused language they want. And they may believe it. Up until the point they have to sell. And then all of a sudden many will care a lot less about the Just Cause and all the other stakeholders. The pressure investors can exert on the company to do things in the name of finite objectives can be and often is devastating to the long-term prospects of the company. Long is the list of purpose-driven executives who say that their investors are different, that they do care about the company’s Cause . . . until it’s time to sell. (The ones I talked to asked that I not mention the names of their companies for fear of upsetting their investors.)
There is no such thing as constant growth, nor is there any rule that says high-speed growth is necessarily a great strategy when building a company to last. Where a finite-minded leader sees fast growth as the goal, an infinite-minded leader views growth as an adjustable variable. Sometimes it is important to strategically slow the rate of growth to help ensure the security of the long-term or simply to make sure the organization is properly equipped to withstand the additional pressures that come with high-speed growth. A fast-growing retail operation, for example, may choose to slow the store expansion schedule in order to put more resources into training and development of staff and store managers. Opening stores is not what makes a company successful; having those stores operate well is. It’s in a company’s interest to get things done right now rather than wait to deal with the problems high-speed growth can cause later. The art of good leadership is the ability to look beyond the growth plan and the willingness to act prudently when something is not ready or not right, even if it means slowing things down.
From the 1950s to the ’70s, the concept of “forecasting” was considered critical across multiple institutions. Teams of “futurists” were brought in to examine technological, political and cultural trends in order to predict their future impact and prepare for it. (Such a practice may have helped Garmin proactively adapt to advancements in mobile phone technology instead of being forced to react to it.) Even the United States federal government was in on it. In 1972, Congress established the Office of Technology Assessment specifically to examine the long-term impact of proposed legislation. “They’re beginning to realize that legislation will remain on the books for 20 or 50 years before it’s reviewed,” said Edward Cornish, president of the World Future Society, “and they want to be sure that what they do now won’t have an adverse impact years from today.” However, the discipline fell out of favor during the 1980s, with some in government thinking it a waste of money to try to “predict the future.” The office was officially closed in 1995. Though today futurists still exist in the business world, they are usually tasked with helping a company predict trends that can be marketed to rather than assessing future impact of current choices.
Finite-focused leaders are often loath to sacrifice near-term gains, even if it’s the right thing to do for the future, because near-term gains are the ones that are most visible to the market. And the pressure this mindset exerts on others in the company to focus on the near-term often comes at the detriment of the quality of the services or the products we buy. That is the exact opposite of what Adam Smith was talking about. If the investor community followed Smith’s philosophies, they would be doing whatever they could to help the companies in which they invested make the best possible product, offer the best possible service and build the strongest possible company. It’s what’s good for the customer and the wealth of nations. And if shareholders really were the owners of the companies in which they invested, that is indeed how they would act. But in reality, they don’t act like owners at all. They act more like renters.
Consider how differently we drive a car we own versus one we rent, and all of a sudden it will become clear why shareholders seem more focused on getting to where they want to go with little regard to the vehicle that’s taking them there. Turn on CNBC on any given day and we see discussions dominated by talk of trading strategies and near-term market moves. These are shows about trading, not about owning. They are giving people advice on how to buy and flip a house, not how to find a home to raise a family. If short-term-focused investors treat the companies in which they invest like rental cars, i.e., not theirs, then why must the leaders of the companies treat those investors like owners? The fact is, public companies are different from private companies and do not need to conform to the same traditional definition of ownership. If our goal is to build companies that can keep playing for lifetimes to come, then we must stop automatically thinking of shareholders as owners, and executives must stop thinking that they work solely for them. A healthier way for all shareholders to view themselves is as contributors, be they near-term or long-term focused.
Whereas employees contribute time and energy, investors contribute capital (money). Both forms of contribution are valuable and necessary to help a company succeed, so both parties should be fairly rewarded for their contributions. Logically, for a company to get bigger, stronger or better at what they do, executives must ensure that the benefit provided by investors’ money or employees’ hard work should, as Adam Smith pointed out, go first to those who buy from the company. When that happens, it is easier for the company to sell more, charge more, build a more loyal customer base and make more money for the company and its investors alike. Or am I missing something here? In addition, executives need to go back to seeing themselves as stewards of great institutions that exist to serve all the stakeholders. The impact of which serves the wants, needs and desires of all those involved in a company’s success, not just a few.
The fact is, we all want to feel like our work and our lives have meaning. It’s part of what it means to be human. We all want to feel a part of something bigger than ourselves. I have to believe this contributes to the reason so many companies say they primarily serve their people and their customers when they are in fact primarily serving their executive ranks and their shareholders. For many of us, even if we don’t have the words, the modern form of capitalism we have just feels like something doesn’t align with our values. Indeed, if we all truly embraced Friedman’s definition of business, then companies would have visions and missions that were solely about maximizing profit and we’d all be fine with it. But they don’t. If the true purpose of business was only to make money, there would be no need for so many companies to pretend to be cause or purpose driven. Saying a business exists for something bigger and actually building a business to do it are not the same thing. “And only one of those strategies has any value in the Infinite Game.”
Business today is subject to a dizzying rate of change. And all that change seems to be taking its toll. The time it takes before a company is forced out of the game is getting shorter and shorter. The average life of a company in the 1950s, if you recall, was just over 60 years. Today it is less than 20 years. According to a 2017 study by Credit Suisse, disruptive technology is the reason for the steep decline in company life span. However, disruptive technologies are not a new phenomenon. The credit card, the microwave oven, Bubble Wrap, Velcro, transistor radio, television, computer hard disks, solar cells, optic fiber, plastic and the microchip were all introduced in the 1950s. Save for Velcro and Bubble Wrap (which are disruptive in a completely different way), that’s a pretty good list of disruptive technologies. “Disruption” is likely not the cause of the challenge, it’s a symptom of a more insidious root cause. It is not technology that explains failure; it is less about technology, per se, and more about the leaders’ failure to envision the future of their business as the world changes around them. It is the result of shortsightedness. And shortsightedness is an inherent condition of leaders who play with a finite mindset. In fact, the rise of this kind of shortsightedness over the past 50 years can be traced back to the philosophies of a single person.
In a watershed article from 1970, Milton Friedman, the Nobel Prize–winning economist, who is considered one of the great theorists of today’s form of capitalism, laid out the foundation for the theory of shareholder primacy that is at the heart of so much finite-minded business practice today. “In a free-enterprise, private-property system,” he wrote, “a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” Indeed, Friedman insisted that “there is one and only one social responsibility of business, to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” In other words, according to Friedman, the sole purpose of business is to make money and that money belongs to shareholders. These ideas are now firmly ingrained in the zeitgeist. Today it is so generally accepted that the “owner” of a company sits at the top of the benefit food chain and that business exists solely to create wealth, that we often assume that this was always the way that the game of business was played and is the only way it can be played. Except it wasn’t . . . and it isn’t.
Friedman seemed to have a very one-dimensional view of business. And as anyone who has ever led, worked for or bought from a “business knows, business is dynamic and complicated. Which means, it is possible that, for the past 40+ years, we have been building companies with a definition of business that is actually bad for business and undermines the very system of capitalism it proclaims to embrace.
Capitalism Before Friedman”
“For a more infinite-minded alternative to Friedman’s definition of the responsibility of business, we can go back to Adam Smith. The eighteenth-century Scottish philosopher and economist is widely accepted as the father of economics and modern capitalism. “Consumption,” he wrote in The Wealth of Nations, “is the sole end and purpose of all production and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” He went on to explain, “The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it.” Put simply, the company’s interests should always be secondary to the interest of the consumer (ironically, a point Smith “believed so “self-evident,” he felt it was absurd to try to prove it, and yet here I am writing a whole book about it).
Smith, however, was not blind to our finite predilections. He recognized that “in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.” In a nutshell, Smith accepted that it was human nature for people to act to advance their own interests. He called our propensity for self-interest the “invisible hand.” He went on to theorize that because the invisible hand was a universal truth (because of our selfish motivations we all want to build strong companies), it ultimately benefits the consumer. “It is not from the benevolence of the butcher, the brewer, or the baker that we can expect our dinner, but from their regard to their own interest,” he explained. The butcher has a selfish desire to offer the best cuts of meat without regard for the brewer or the baker. And the brewer wants to make the best beer, regardless of what meat “or bread is available on the market. And the baker wants to make the tastiest loaves without any consideration for what we may put on our sandwiches. The result, Smith believed, is that we, the consumers, get the best of everything . . . at least we do if the system is balanced. However, Smith did not consider a time in which the selfishness of outside investors and an analyst community would put that system completely out of balance. He did not anticipate that an entire group of self-interested outsiders would exert massive pressure on the baker to cut costs and use cheaper ingredients in order to maximize the investors’ gains.”
“If history or 18th-century brogue-tongued philosophers are not your jam, we need simply look at how capitalism changed after the idea of shareholder supremacy took over—which only happened in the final decades of the twentieth century. Prior to the introduction of the shareholder primacy theory, the way business operated in the United States looked quite different. “By the middle of the 20th century,” said Cornell corporate law professor Lynn Stout in the documentary series Explained, “the American public corporation was proving itself one of the most effective and powerful and beneficial organizations in the world.”
“Companies of that era allowed for average Americans, not just the wealthiest, to share in the investment opportunities and enjoy good returns. Most important, “executives and directors viewed themselves as stewards or trustees of great public institutions that were supposed to serve not just the shareholders, but also bondholders, suppliers, employees and the community.” It was only after Friedman’s 1970 article that executives and directors started to see themselves as responsible to their “owners,” the shareholders, and not stewards of something bigger. The more that idea took hold in the 1980s and ’90s, the more incentive structures inside public companies and banks themselves became excessively focused on shorter-and-shorter-term gains to the benefit of fewer and fewer people. It’s during this time that the annual round of mass layoffs to meet arbitrary projections became an accepted and common strategy for the first time. Prior to the 1980s, such a practice simply didn’t exist. It was common for people to work a practical lifetime for one company. The company took care of them and they took care of the company. Trust, pride and loyalty flowed in both directions. And at the end of their careers these long-time employees would get their proverbial gold watch. I don’t think getting a gold watch is even a thing anymore. These days, we either leave or are asked to leave long before we would ever earn one.
Capitalism Abuse”
“The finite-minded form of capitalism that exists today bears little resemblance to the more infinite-minded form that inspired America’s founders (Thomas Jefferson owned all three volumes of Smith’s Wealth of Nations) and served as the bedrock for the growth of the American nation. Capitalism today is, in name only, the capitalism that Adam Smith envisioned over 200 years ago. And it looks nothing like the capitalism practiced by companies like Ford, Kodak and Sears in the late 19th and early 20th centuries, before they too fell prey to finite thinking and lost their way. What many leaders in business practice these days is more of an abuse of capitalism, or “capitalism abuse.” Like in the case of alcohol abuse, “abuse” is defined as improper use of something. To use something for a reason other than that for which it was intended. And if capitalism was intended to benefit the consumer and the leaders of companies were to be the stewards of something greater than themselves, they are not using it that way today.
“Some may say my view—that the purpose of a company is not just to make money but to pursue a Just Cause—is naïve and anticapitalist. First, I would urge us all to beware the messenger. My assumption is that those who most fiercely defend Friedman’s views on business, and many of the current and accepted business practices he inspired, are the ones who benefit most from them. But business was never just about making money. As Henry Ford said, “A business that makes nothing but money is a poor kind of business.” Companies exist to advance something—technology, quality of life or anything else with the potential to ease or enhance our lives in some way, shape or form. That people are willing to pay money for whatever a company has to offer is simply proof that they perceive or derive some value from those things. Which means the more value a company offers, the more money and the more fuel they will have for further advancements. Capitalism is about more than prosperity (measured in features and benefits, dollars and cents); it’s also about progress (measured in quality of life, technological advancements and the ability of the human race to live and work together in peace).
The constant abuse since the late 1970s has left us with a form of capitalism that is now, in fact, broken. It is a kind of bastardized capitalism that is organized to advance the interests of a few people who abuse the system for personal gain, which has done little to advance the true benefits of capitalism as a philosophy (as evidenced by anticapitalist and protectionist movements around the globe). “Indeed, the entire philosophy of shareholder primacy and Friedman’s definition of the purpose of business was promoted by investors themselves as a way to incentivize executives to prioritize and protect their finite interests above all else.
It is due in large part to Milton Friedman’s ideas, for example, that corporations started tying executive pay to short-term share price performance rather than the long-term health of the company. And those who embraced Friedman’s views rewarded themselves handsomely. The Economic Policy Institute reported that in 1978, the average CEO made approximately 30 times the average worker’s “pay. Where the average CEO has seen a nearly 950 percent increase in their earnings, the American worker, meanwhile, has seen just over 11 percent in theirs. According to the same report, average CEO pay has increased at a rate 70 percent faster than the stock market!
It doesn’t take an MBA to understand why. As Dr. Stout explains in her book, The Shareholder Value Myth, “If 80 percent of the CEO’s pay is based on what the share price is going to do next year, he or she is going to do their best to make sure that share price goes up, even if the consequences might be harmful to employees, to customers, to society, to the environment or even to the corporation itself in the long-term.” When we tie pay packages directly to stock price, it promotes practices like closing factories, keeping wages down, implementing extreme cost cutting and conducting annual rounds of layoffs—tactics that might boost the stock price in the near term, but often do damage to an organization’s ability to survive and thrive in the Infinite Game. Buybacks are another often legitimate practice that has been abused by public company executives seeking to prop up their share price. By buying back its own shares, based on the laws of supply and demand, they temporarily increase demand for their stock, which temporarily drives up the price (which temporarily makes the executives look good).
Though many of the practices used to drive up stock prices in the short term sound ethically dubious, if we look back to Friedman’s definition of the responsibility of business, we find that he leaves the door wide open for such behavior, even encourages it. Remember, his only guidance for the responsibility companies must obey is to act within the bounds of the law and “ethical custom.” I, as one observer, am struck by that awkward phrase, “ethical custom.” Why not just say “ethics”? Does ethical custom mean that if we do something frequently enough it becomes normalized and is thus no longer unethical? If so many companies use regular rounds of mass layoffs, using people’s livelihoods, to meet arbitrary projections, does that strategy then cease to be unethical? If everyone is doing it, it must be okay.
As a point of fact, laws and “ethical customs” usually come about in response to abuses, not by predicting them. In other words, they always lag behind. Based on the common interpretation of Friedman’s definition, it’s almost a requirement for companies to exploit those gaps to maximize profit until future laws and ethical customs tell them they can’t. Based on Friedman, it is their responsibility to do so!
Technology companies, like Facebook, Twitter and Google, certainly look like they are more comfortable asking for forgiveness as they run afoul of ethical customs, as opposed to leading with a fundamental view of how they safeguard one of their most important assets: our private data. Based on Friedman’s standards, they are doing exactly what they should do.
If we are using a flawed definition of business to build our companies today, then we are likely also promoting people and forming leadership teams best qualified to play by the finite rules that Friedman espoused—leadership teams that are probably the least equipped to navigate the ethical requirements necessary to avoid exploiting the system for self-gain. Built with the wrong goal in mind, these teams are more likely to make decisions that do long-term damage to the very organizations, people and communities they are supposed to be leading and protecting. As King Louis XV of France said in 1757, “Après moi le dèluge.” “After me comes the flood.” In other words, the disaster that will follow after I’m gone will be your problem, not mine. A sentiment that seems to be shared by too many finite leaders today.
The Pressure to Play with a Finite Mindset”
It’s a big open secret among the vast majority of public-company executives that the theory of shareholder primacy and the pressure Wall Street exerts on them are actually bad for business. The great folly is that despite this knowledge and their private grumblings and misgivings, they continue to defend the principle and yield to the pressure.
I am not going to waste precious ink making a drawn-out argument about the long-term impact of what happened to our country and global economies when executives bowed to those pressures. It is enough to call attention to the man-made recession of 2008, the increasing stress and insecurity too many of us feel at work and a gnawing feeling that too many of our leaders care more about themselves than they do about us. This is the great irony. The defenders of finite-minded capitalism act in a way that actually imperils the survival of the very companies from which they aim to profit. It’s as if they have decided that the best strategy to get the most cherries is to chop down the tree.
Thanks in large part to the loosening of regulations that were originally introduced to prevent banks from wielding the kind of influence and speculative tendencies that caused the Great Depression of 1929 to happen, investment banks once again wield massive amounts of power and influence. The result is obvious—Wall Street forces companies to do things they shouldn’t do and discourages them from doing things they should.
Entrepreneurs are not immune from the pressure either. In their case, there is often intense pressure to demonstrate constant, high-speed growth. To achieve that goal, or when growth slows, they turn to venture capital or private equity firms to raise money. Which sounds good in theory. Except there is a flaw in the business model of private equity that can wreak havoc with any company keen to stay in the game. For private equity and venture capital firms to make money, they have to sell. And it’s often about three to five years after they make their initial investment. A private equity firm or venture capitalist can use all the flowery, infinite game, Cause-focused language they want. And they may believe it. Up until the point they have to sell. And then all of a sudden many will care a lot less about the Just Cause and all the other stakeholders. The pressure investors can exert on the company to do things in the name of finite objectives can be and often is devastating to the long-term prospects of the company. Long is the list of purpose-driven executives who say that their investors are different, that they do care about the company’s Cause . . . until it’s time to sell. (The ones I talked to asked that I not mention the names of their companies for fear of upsetting their investors.)
There is no such thing as constant growth, nor is there any rule that says high-speed growth is necessarily a great strategy when building a company to last. Where a finite-minded leader sees fast growth as the goal, an infinite-minded leader views growth as an adjustable variable. Sometimes it is important to strategically slow the rate of growth to help ensure the security of the long-term or simply to make sure the organization is properly equipped to withstand the additional pressures that come with high-speed growth. A fast-growing retail operation, for example, may choose to slow the store expansion schedule in order to put more resources into training and development of staff and store managers. Opening stores is not what makes a company successful; having those stores operate well is. It’s in a company’s interest to get things done right now rather than wait to deal with the problems high-speed growth can cause later. The art of good leadership is the ability to look beyond the growth plan and the willingness to act prudently when something is not ready or not right, even if it means slowing things down.
From the 1950s to the ’70s, the concept of “forecasting” was considered critical across multiple institutions. Teams of “futurists” were brought in to examine technological, political and cultural trends in order to predict their future impact and prepare for it. (Such a practice may have helped Garmin proactively adapt to advancements in mobile phone technology instead of being forced to react to it.) Even the United States federal government was in on it. In 1972, Congress established the Office of Technology Assessment specifically to examine the long-term impact of proposed legislation. “They’re beginning to realize that legislation will remain on the books for 20 or 50 years before it’s reviewed,” said Edward Cornish, president of the World Future Society, “and they want to be sure that what they do now won’t have an adverse impact years from today.” However, the discipline fell out of favor during the 1980s, with some in government thinking it a waste of money to try to “predict the future.” The office was officially closed in 1995. Though today futurists still exist in the business world, they are usually tasked with helping a company predict trends that can be marketed to rather than assessing future impact of current choices.
Finite-focused leaders are often loath to sacrifice near-term gains, even if it’s the right thing to do for the future, because near-term gains are the ones that are most visible to the market. And the pressure this mindset exerts on others in the company to focus on the near-term often comes at the detriment of the quality of the services or the products we buy. That is the exact opposite of what Adam Smith was talking about. If the investor community followed Smith’s philosophies, they would be doing whatever they could to help the companies in which they invested make the best possible product, offer the best possible service and build the strongest possible company. It’s what’s good for the customer and the wealth of nations. And if shareholders really were the owners of the companies in which they invested, that is indeed how they would act. But in reality, they don’t act like owners at all. They act more like renters.
Consider how differently we drive a car we own versus one we rent, and all of a sudden it will become clear why shareholders seem more focused on getting to where they want to go with little regard to the vehicle that’s taking them there. Turn on CNBC on any given day and we see discussions dominated by talk of trading strategies and near-term market moves. These are shows about trading, not about owning. They are giving people advice on how to buy and flip a house, not how to find a home to raise a family. If short-term-focused investors treat the companies in which they invest like rental cars, i.e., not theirs, then why must the leaders of the companies treat those investors like owners? The fact is, public companies are different from private companies and do not need to conform to the same traditional definition of ownership. If our goal is to build companies that can keep playing for lifetimes to come, then we must stop automatically thinking of shareholders as owners, and executives must stop thinking that they work solely for them. A healthier way for all shareholders to view themselves is as contributors, be they near-term or long-term focused.
Whereas employees contribute time and energy, investors contribute capital (money). Both forms of contribution are valuable and necessary to help a company succeed, so both parties should be fairly rewarded for their contributions. Logically, for a company to get bigger, stronger or better at what they do, executives must ensure that the benefit provided by investors’ money or employees’ hard work should, as Adam Smith pointed out, go first to those who buy from the company. When that happens, it is easier for the company to sell more, charge more, build a more loyal customer base and make more money for the company and its investors alike. Or am I missing something here? In addition, executives need to go back to seeing themselves as stewards of great institutions that exist to serve all the stakeholders. The impact of which serves the wants, needs and desires of all those involved in a company’s success, not just a few.
The fact is, we all want to feel like our work and our lives have meaning. It’s part of what it means to be human. We all want to feel a part of something bigger than ourselves. I have to believe this contributes to the reason so many companies say they primarily serve their people and their customers when they are in fact primarily serving their executive ranks and their shareholders. For many of us, even if we don’t have the words, the modern form of capitalism we have just feels like something doesn’t align with our values. Indeed, if we all truly embraced Friedman’s definition of business, then companies would have visions and missions that were solely about maximizing profit and we’d all be fine with it. But they don’t. If the true purpose of business was only to make money, there would be no need for so many companies to pretend to be cause or purpose driven. Saying a business exists for something bigger and actually building a business to do it are not the same thing. “And only one of those strategies has any value in the Infinite Game.”
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