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Customers, Employees, Stockholders: CEOs Are Finally Worried

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Last week, a group of almost 200 of America’s top business executives, collectively called The Business Roundtable, released a statement that declared that “Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity.” Here’s more from the statement:

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

-Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.

-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.

-Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.

-Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

-Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

“Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

The reason that this is newsworthy is because it’s a repudiation to the prevailing belief that the purpose of business is to maximize shareholder value. That “shareholder theory” was highlighted by economist Milton Friedman in an editorial in the New York Times in 1970, when he argued that the CEO is an employee of the shareholders, whose job it is to give them the highest return possible. Friedman’s theory was accepted as gospel for the next 40+ years, and it basically absolved business leaders of any social responsibility to the communities they operated in. It’s hard to measure what the wholesale adoption of Freidman’s theory triggered for good and ill, but virtually everyone in America has been affected by the layoffs, consolidations, outsourcing, offshoring, etc., that have been part of the de rigueur toolset for corporate executives for more than a generation as a way to maximize the return to shareholders (i.e. the ”owners”), often at the expense of employees and customers.

The Business Roundtable’s statement sounds to me like a return to a “theory of business” first articulated by management guru Peter Drucker in his 1954 book entitled The Practice of Management. Drucker said that business exists as:

-an economic establishment that produces value for its stakeholders and for the society,

-a community that employs people, pays them, develops them, and coordinates their efforts to increase productivity,

-a “social institution that is deeply embedded in society and values and as such is affected by public interest discussion, debate, and values.”

Given the growing gap between the wealthy and everyone else in America, it’s clear that the CEOs are getting worried that businesses have gone too far in maximizing shareholder value at the expense of employees and customers, and that the discontent is on the rise.

Well, it’s about time! But you have to wonder if they are trying to close the door after the horse has left the barn.

What About Retail?

The Retail industry is a perfect example. When it comes to our industry, a refocus on employees could be viewed as too little, too late. Don’t blame Amazon or the Internet - it really comes down to the brutality of the Retail P&L. In RSR’s studies, we’ve seen very little appetite on the part of retailers to spend more on labor. Rather, the focus has been on getting more out of the labor that’s already there.

Working in Retail is hard: hours are long, working on nights and weekends is common, employees spend hours on their feet, training is minimal, benefits are often lousy, and the pay is low. That is why job search site Careercast rates “Retail salesperson” as the 4th worst job to have (after Taxi drivers, logging workers, and newspaper reporters – think about that!). And opportunities for growth aren’t promising; in spite of a decade of pressure from consumers who want more and better service as the price of their loyalty, the U.S. Bureau of Labor Statistics projects below-average growth in the number of retail jobs through 2026. In other words, retailers aren’t spending more on labor, and that in turn affects how consumers feel about retailers’ brands.

RSR’s December 2017 study on the state of the retail workforce wasn’t much more encouraging. Here’s how we summarized the findings from the benchmark report:

What we’ve found … is a basket of contradictions:

•Retailers say store employees are what will differentiate the store, but no one wants to train them

•Call center employees are often cited as retailers’ best sales people, but retailers don’t believe that giving store employees access to the same level of information would help them catch up

•Retailers acknowledge that customer engagement is getting more complex, and spread across many more touchpoints than ever before, but persist in focusing on advertising promotions – and certainly don’t trust or value elevating the role of the front-line employee in creating customer engagement. And this is not exclusive of the store employee, either.

It’s frustrating to watch these contradictions play out. Retailers understand they need to think differently about customer engagement, about the role of the store, and about the employee. Even in grocery retailing, where almost all available employee expertise is behind a counter instead of in an aisle, retailers say they understand that the employee is critical to creating a differentiated store experience.

And yet, few retailers trust those same employees to have access to customer information, let alone use it. We hear, anecdotally, “that’s just the way it is” or “that’s what Wall Street wants” or “retail just isn’t structured to have low-turnover, highly skilled front-line employees.”

There might be reason for optimism, though. The Retail industry is well represented at the Business Roundtable by industry leaders like Jeff Bezos (Amazon), Tim Cook (Apple), Corrie Barry (Best Buy), Larry Merlo (CVS Health), Craig Menear (Home Depot), Jeff Gennette (Macy’s), Brian Cornell (Target), Stephano Pessino (Walgreens), and Doug McMillan (Walmart). Those brands represent a huge chunk of the U.S. retail industry – maybe they’re serious?

Will the Business Roundtable declaration trigger a change across industries? One can hope; Friedman’s 1970 “shareholder theory” triggered a revolution. Before that, Drucker’s 1954 treatise defined modern corporate management. Time will tell if this new declaration of the purpose of business will have a big influence, swinging the pendulum back towards employees, customers, and communities. I can tell you this: if it does, it will be welcomed across the country. The real purpose of business is to create useful work for the people of the community and good products for consumers. When the needs of those two constituencies are met, the owners do fine.

 


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Articles & Opinions August 27, 2019
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