Will purpose and transparency kill your business model? Better create a new one fast.

The traditional approach to employee and other stakeholder engagement activities has been addressed predominantly on an operational level  with a focus on what the corporation is doing. By changing practices it is indeed possible to impact engagement but only if your stakeholders believe that you are doing it for the right reasons and in the right way.

Stakeholder engagement  strategies should follow Simon Sinek's golden circle model – always start with the why, followed by the how before you even start thinking about the what.

The Why

Stakeholders will forgive you for mistakes done for the right reasons – not for perfect products created by the exploitation of others. Although most companies have been started to serve a specific purpose or create value for stakeholders, the same companies often over time transform their value focus to a cost focus. A transformation that narrows the value creation to one single stakeholder – the shareholder itself. Many senior managers proudly declare their purpose as serving the shareholder – even when the other stakeholders are listening.

“Problems are just businesses waiting for the right entrepreneur to unlock the value.” Jay Samit         

Assuming that taking from the environment, society, the customers and the employees to give to shareholders is in the best long term interest of the shareholder is not logical. The shareholder will benefit when all other stakeholders benefit in a way that creates long term sustainable competitive advantage.

Most companies start like disruptive wolfs hunting apathetic market sheep busy competing for grass. Over time they themselves become sheep anxiously scanning for disruptive predators while protecting their patch of grass. Not a purpose that is likely to engage stakeholders.

Preserving or recreation of the purpose of the corporation will be increasingly important with the wave of millenials taking over as the prime stakeholders. It will be important to have a ”why” that serves many stakeholders simultaneously in what is know as super alignment.

"Make yourself sheep and the wolves will eat you" 

Benjamin Franklin                                       

The How

The rise of the millenials also makes it important how corporations operate not only as a corporate citizen with respect for society, the environment, customers, employees and other stakeholders but also with transparency.

The concept of corporate transparency is developing rapidly and can be a major source of stakeholder engagement. From being a spotlight you only pointed at the cleaner areas of the corporate exhibition halls the social media revolution is illuminating everything, including dirty laundry. Transparency is not a strategy anymore – organisations will have to work on creating sustainable business models that can withstand light rather than try and sugarcoat the existing business model.

”Transparency may be the most disruptive and far reaching 

innovation to come out of social media”           Paul Gillin

Transparency normally stops when getting close to the business model and the supply chain. Traditional companies are not comfortable disclosing their internal costs of manufacturing and similar. The official reason is that it is proprietary information that needs to be held from competitors but it could also bet that  customers would be furious knowing how they get robbed. And the other sheep are probably experts in grass anyway.

A few brave companies are taking this next step and disclosing internal costs to their customers. The company Everlane in the fashion industry have given full disclosure in a market where 8x markup is common. No doubt they will attract unwanted attention to the other sheep in that marketplace and has the potential of becoming a wolf.

It is uncomfortable for most leaders to address the why and the how of their strategy. ”Why cant we just focus on the shareholder like everybody else”? ”Why can’t we hide the true nature of our operation so we do not attract uncomfortable questions”?

Unfortunately addressing the why and the how of the strategy is seen as a negative that adds costs and not as having the potential to create significant engagement with the company's stakeholders.

“The best way to predict the future is to invent it.”

                                                              Alan Kay

Shareholder focus kills employee engagement.

Corporate view of motivation

The modern era of HR is predominantly dominated by a Maslowian view of motivation: The individual is driven by a motivation to ffulfill increasingly higher needs depending on the completion of a lower level of motivation. Although still useful, the Maslow Hierarchy, used in an organisational setting, creates a division between the employee and the company. The company has to deliver a lot of elements to the employee or risk the employee leaving. This creates thinking where every dollar that is given to the employee is seen to come out of the shareholders pockets - a zero sum game. This has become evident in the pre Financial Crisis age where companies relentlessly have reduced headcount to meet cost targets, completely ignoring that the same employees had a positive impact on revenue. If the logic of employees only affecting cost was true, corporations should have no people at all.

Purpose driven motivation

A more useful model for human motivation is what is known as the 3^rd Viennese school of psychology based on Viktor Frankls work on Logotheraphy.  In opposition to the first two – Freud’s view of human motivation as search for pleasure and Adler’s search for power, Frankl work points towards humans being motivated by a search for meaning. Rather than seeing people’s motivation as a result of external stimuli he believes that motivation comes from within and is based on your subjective view of what meaning is. Despite meaning being subjective and situation bound, Frankl suggests that meaning is often associated with doing good for others, with love and with the freedom to choose your attitude in any given situation – even in hopeless situations.

A survivor of the Holocaust, Frankl got plenty of experience of humans in hopeless situations and found that the people surviving rarely where the physically strongest but more often somebody that had a strong purpose and a reason to survive. He captured it in the phrase:

It is not what you expect of life that is important; it is what life expects of you.

Frankl’s motivational model is becoming increasingly more relevant as corporations are starting to understand that employee engagement is crucial to the creation of sustainable competitive advantage. The traditional employee satisfaction surveys show the same and predictable results independent of it is conducted in successful companies or the opposite. Employee engagement is strongly impacted by purpose – both the purpose of the individual’s contribution to the corporate purpose and to the corporate purpose itself. And a good purpose isn't about making money!

Corporate purpose is important

The financial crisis killed the real and initial purpose of many corporations – a purpose often focused on bringing value to one or more of the company’s stakeholders. Instead a relentless shareholder focus took over in a way that would have made Milton Friedman proud. Making bosses and owners wealthier is not a noble purpose that engages employees and unlocks productivity. Jack Welsh ex Ceo of GE calls shareholder focus the dumbest concept he has ever heard of and Kip Tindell of Container Store says that shareholder focus alienates all other stakeholder groups including employees and customers.

A new and engaging way of creating value

Leading companies have found that creating strategies that serves the needs of many stakeholder groups simultaneously in what Tom Gardner, CEO of Moetly Fool calls super-alignment creates a strong purpose that engages stakeholders to support the company in a way that creates competitive advantage. The beauty of stakeholder alignment is that it also increases the value for the shareholders – a company loved by its customers and employees will not fail completely.

Talking against shareholder value is often seen as an attack on capitalism and the free market and a defense of totalitarian systems. Reality is that no company became great because they wanted to make money – they became great because they created value for others. Somewhere down the line it was forgotten that capitalism is a social experiment focused on value creation for others and not ugly exploitation of often powerless stakeholder groups to satisfy the greed of a few.

Golden Circle Strategy Development

Golden Circle Strategy Development

Does your company have a strategy or does it only have a strategic goal? This simple question can reveal the strategic thinking process in an organisation. In some companies strategies starts with defining a number that will generate a nice bonus for senior management and a number that will preserve status quo. The number is carved up into business unit numbers, into group numbers and eventually into individual numbers. From that a myriad of actions plans are developed in support of the divine number and execution starts. Exceeding numbers will be rewarded, failing to meet numbers punished - a strange kind of logic given the strategic goal often is the result of wishful thinking. Selecting the divine target number did not change anything in the company or its competitiveness.

Defining Strategy

Although many different definitions of strategy exists, there is consensus that Strategy is about the future, it is about winning and it is about creating sustainable competitive advantage. The financial goal is not a strategy - it is an outcome of a strategy. So the key strategic question is not how much, the key question is why.

The relentless focus on financial return to shareholders has resulted in many companies forgetting why they exist? Why the where founded in the first place. This purpose of the corporation is focused on creating value for one or more of the corporation’s stakeholders. When this purpose is forgotten and not honoured, the corporation loses a significant source of motivation, not only for employees and customers but also for other stakeholder groups.

Simon Sinek’s golden Circle

The best communication strategies to stakeholders are using Simon Sinek’s golden circle: People don’t buy what you make, they buy why you make it. Communication should be created from the inside out of the circle.

Rather than using communication and marketing to create a favourable (but often distorted) image of the corporation to persuade customers to buy, it is better to change the corporation into the desired image.

Leaders should spend less time creating a favorable image of their corporations and more time transforming the corporation into that image.

A useful way of creating a strategy that will be easy to communicate to all stakeholders is to use the Golden Circle for strategy development.

Start with “Why”

It is important to start the process not by focusing on shareholders or value for the corporation - nobody will buy from you just to make you prosperous.

The most important element of the strategy is to try and answer the Why question. Why do you exist?  What is the purpose of the strategy? What kind of value will the strategy create for what stakeholders? If many stakeholders can benefit from the same strategy you have what Tom Gardner of the Moetly Fool calls a super-aligned strategy and what he has identified as resulting in superior returns. If you believe that you can create value for others and be able to monetize it above and beyond cost – then you have a viable strategy. The viability analysis has to be late in the process or you will limit your thinking. You can also choose to ignore viability which Google is known for doing: Make it radically useful and we will figure out money later.

The “How” is going to important for implementation

The next stage of the strategy development has to have a high degree of focus on implementation. Most often senior managers go to a nice place and pull the plug to the world while they develop a boxed plan that later will be presented to the stakeholders. Most people don’t enjoy being told without the ability to influence so not surprisingly most large strategies fail to deliver the intended results. How you develop the strategy is going to be a lot more important that what you actually do. Open up the dialogue to a significant stakeholder groups and allow their representatives to be part of the strategy development, this will ensure that even if their needs are not met, they at least feel heard. Expanding the group will also increase the expertise that the possibility of a more innovative strategy that create value for more stakeholders at the same time. The participants will keep their groups informed and act as ambassadors. You will also be warned about what could be unacceptable to stakeholders and avoid potential trouble. Being part of something creates significant engagement.

“Don’t confuse people’s resistance to change with their resistance to be manipulated.”

The “What” - what you are already doing well.

Delaying the normal wolf pack fight over prey or organisational development as some like to call it will increase the probability of a successful strategy and implementation. You cannot remove managers beliefs that they need to have most power, assets and people reporting to them. However if the why is crystal clear and many representatives has been involved in the process, it is much less open for interpretation. The strategy will also have many fans that can help take corrective actions should it be hit by unforeseen trouble.

Is your strategy Superaligned?

After decades of relentless focus on shareholder value, the story of the primary purpose of business being profit to shareholders is starting to shake in its foundation. Based on Milton Friedman’s thoughts that shareholders can be altruistic with the capital that businesses provide but businesses themselves has to only focus on shareholder value. With the emergence of stakeholder theory it has become obvious that there are more groups being impacted by and are impacting the corporation – it is not enough to focus on the shareholder. Businesses are dependent of serving all or several of their stakeholders at the same time in what Tom Gardner, CEO of investment advisors, The Moetly Fool calls super-alignment. Gardner is looking for Superalignment when picking stocks – a principle that has yielded a return of 216% vs the S&P500 return of 58% since 2002.

The most successful corporations were not founded to make money.                                They were founded to solve a problem.  Kip Tindell

Small first steps

Corporations has taken steps to improve relations with employees through improvements of the environment, compensation and benefits and marketing departments have been upgraded to invent saint like stories about the company and its products. The true operating philosophy did not have to change – only the stories served to employees and customers. In the age of internet and social networks this model is as sustainable as an iceberg in equator. Employees can whistle-blow and post their opinions on glassfloor.com or similar networks and customers can easily get experience of other customers or post their own experience. Corporations cannot operate in one way and at the same time serve a fictional story of “Great Corporate Citizenship”.

Creating value for others is the engine of Capitalism. R Edward Freeman

What is even more troubling for corporate dinosaurs that are not willing to change is that the external stakeholders besides customers has the power to truly impact the corporation and in seconds create a sh!tstorm that can bring a large corporation to its knees. The Boycott Amazon, Starbucks voluntary tax payment in Europe and Greenpeace’s battle with Shell that resulted in Lego discontinuing their cooperation with the oil giant are just a few examples of stakeholder power on the rise.

Communication levels with stakeholders.

With the increasing levels of transparency it is going to be important to have a continuous dialogue with the corporation’s stakeholders. Not just serving them marketing stories but allowing them to participate in the strategy process of the company and impact the direction.

It will be increasingly important to identify external stakeholder groups and to develop strong relationships and communications with them. Most companies today have to resort to crisis management when a stakeholder group feels violated by the corporation’s activity.

Respecting all stakeholders benefits the shareholders

There is a group of leaders that have abandoned the path of shareholder value lead by Professor R. Edward Freeman of Darden Business School and a growing group of companies in the organisation Conscious Capitalism. They not only see this strategy as the best one – also the most profitable one.

As Edward Freeman is phrasing it; “The story about business being about money and profits only and people are only acting in self-interest - if it was ever true - its time has long gone.”

The CEO of Containerstore, Kip Tindell, advocates placing the shareholder low in a stakeholder hierarchy. When you create value for all other stakeholders – the shareholders win. If all you want to do is to make a lot of money, this is the fastest way. He sees shareholder value as something that just alienates the employees, the customers and other stakeholder groups.

Fill the other guys basket to the brim and money takes care of itself. Carnegie

Or as Howard Schultz put it in 2007 when Starbucks was in trouble; "The pursuit of profit became our reason for being, and that's not the reason that Starbucks is in business. We're in the business of exceeding the expectations of our customers."

Finding strategies and solutions that benefit multiple stakeholders at the same time is not easy and cannot be done behind closed doors. Corporations will have to open up their strategy process not only to make it transparent but also to invite stakeholders to participate in the strategy formation. How alien it might sound for many corporations, the combined knowledge and creativity could be a source of sustainable competitive advantage.

The only infinite resource we have is our creativity. We need to deal with apparent impossible situations and sometimes create miracles - Miracles are when we create value for all of our stakeholders. R. Edward Freeman

Innovation requires employee engagement

The concept of innovation is often associated with companies and products – successful companies like Apple, Google and similar are coined to be innovative or to have innovative products. Nobody has yet found a good way of measuring how innovative a product or an organisation is although number of patents is used by some. This did not help Kodak, Nokia or Motorola much even though each of them had many patents.

The reality is that innovation is a cognitive process that often is team based, especially in a corporate frame and as such not an organisational or product characteristic – it is a way of thinking about new methods of using the present resources.

“Innovation is not an organisational characteristic – it is a human activity”

The role of the organisation is to allow, encourage and enable innovation though their people and their collaborative thinking processes. That means innovation is closely related to motivation, purpose and employee engagement and not just something that happens in a laboratory.

The way that organisations chose (or is forced by tradition) to shape innovation can be divided into 4 different categories:

The two lower categories are typically in well-defined markets, the two left categories are typically larger corporations and the two top categories are the most disruptive.

History has traditionally protected the larger corporations and their access to capital, technology and scale of economy manufacturing. Large corporate super tankers are built to fight similar entities in a competitive battle with well-defined market rules. It was almost impossible for a new company to enter an established market and get access to customers through an exclusive sales network.

The start of the internet century has changed that completely. Foxes – small innovative companies have easy and scale able access to capital, technology, prototyping, knowledge and customers and are not bound by the rules of any markets. The list is growing rapidly lead by companies Uber, Nest, AirBnB, Tesla and similar.

They follow a blue ocean strategy where they redefine the rules of the market and look for joint value creation with customers and collaboration with potential competitors - Google sees Apple not only as a competitor in certain business areas but also as a partner in other.

The established companies have a hard time competing as they are locked in the logic of their market and a zero sum product price battle with similar companies.

Maybe Tesla is still a small company compared to the automotive giants, but they have certainly captured the agenda – so much so that OPEC had to comment that they did not believe Tesla would become successful. The reason Tesla scares the established community is that they are innovative in 4 different areas – all of them disruptive.

Not only are the Tesla cars innovative as a product with a great sustainability message, they also incorporate new innovative technology in storage, drive and information displays. At the same time Tesla uses a business model alien to the industry with ownership of the technology development and the sales channel and finally they think completely different to the incumbents:

”Tesla is not a car company, we are an clean energy storage company”

Elon Musk                             

With this in mind it is of vital importance that companies not only upgrade their labs, their scientists and their people to be able to innovate but also create an environment where innovative thinking is possible. Not just innovative thinking about products but also about business models and how the corporation is organised. Finally it is important to motivate employees to innovate – employee engagement is vital for innovation.

"Great innovation does not come from satisfied employees, 

it comes from fired up engaged employees"